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

[rros]

Calabria live now: https://www.bloomberg.com/live/us

 

"4th Q 2020 for IPO, lot has to happen before we do that..."

 

Asked about settlement due to recent court ruling: "Looking to rebuild capital and once NWS ends which is part of our plan then a lot of these suits go away."  Didn't say no to settlement, didn't say yes to settlement.

 

Interview done, was very short.

 

Here's the interview: https://www.bloomberg.com/news/videos/2019-09-16/fannie-mae-and-freddie-mac-won-t-go-to-market-until-end-of-2020-fhfa-director-says-video

Thank you, Luke. There is a dissonance in his discourse... retaining earnings while making taxpayers' claim proportionally larger? That dagger above is only getting bigger! No amount of capital will be enough. Clearly, they still have not found a way to deal with the elephant in the room.

[muscleman]

Anyone have thoughts on the 6-12 month time period before IPO? It seems after ~6 months of retained earnings and preferred conversion we should be pretty much on way building capital. Potential investors/at least the heavy hitters are aware of the potential and earnings of FNF. Do they really need to see another year of what they can earn before they would invest? Seems like gov giving themselves some cushion but I don't see it being necessary. Thoughts?

 

Also noticed in the inteview that he said its up to the companies to raise the money/IPO. He is only there to regulate, just like Treasury only there to protect tax payers investment. Nice way to deflect the enriching shareholders. Everyone just doing their job to protect their agency. Hopefully there is a big internal push within FnF to IPO quickly and not dick around for a year.

 

What if the commitment fee after the Senior preferred is cancelled is really high and it leaves very little profit available to common holders?

[rros]

Anyone have thoughts on the 6-12 month time period before IPO? It seems after ~6 months of retained earnings and preferred conversion we should be pretty much on way building capital. Potential investors/at least the heavy hitters are aware of the potential and earnings of FNF. Do they really need to see another year of what they can earn before they would invest? Seems like gov giving themselves some cushion but I don't see it being necessary. Thoughts?

 

Also noticed in the inteview that he said its up to the companies to raise the money/IPO. He is only there to regulate, just like Treasury only there to protect tax payers investment. Nice way to deflect the enriching shareholders. Everyone just doing their job to protect their agency. Hopefully there is a big internal push within FnF to IPO quickly and not dick around for a year.

 

What if the commitment fee after the Senior preferred is cancelled is really high and it leaves very little profit available to common holders?

Commitment fees in the business world are usually small. They are not meant as "profit". They compensate the issuer for the opportunity cost of the funds sitting idle. They are common and make sense. They will still mean billions (low single digits) for FF.

[Guest cherzeca]

Anyone have thoughts on the 6-12 month time period before IPO? It seems after ~6 months of retained earnings and preferred conversion we should be pretty much on way building capital. Potential investors/at least the heavy hitters are aware of the potential and earnings of FNF. Do they really need to see another year of what they can earn before they would invest? Seems like gov giving themselves some cushion but I don't see it being necessary. Thoughts?

 

Also noticed in the inteview that he said its up to the companies to raise the money/IPO. He is only there to regulate, just like Treasury only there to protect tax payers investment. Nice way to deflect the enriching shareholders. Everyone just doing their job to protect their agency. Hopefully there is a big internal push within FnF to IPO quickly and not dick around for a year.

 

What if the commitment fee after the Senior preferred is cancelled is really high and it leaves very little profit available to common holders?

Commitment fees in the business world are usually small. They are not meant as "profit". They compensate the issuer for the opportunity cost of the funds sitting idle. They are common and make sense. They will still mean billions (low single digits) for FF.

 

I would be surprised if the commitment fee was more than 50bps.  in theory it should be zero since the US treasury is not funds constrained like a normal commitment lender, but getting away from theory, it should be a fair market fee and 50bps is within a fair range.  so $500MM per year for a $100B commitment

[muscleman]

Anyone have thoughts on the 6-12 month time period before IPO? It seems after ~6 months of retained earnings and preferred conversion we should be pretty much on way building capital. Potential investors/at least the heavy hitters are aware of the potential and earnings of FNF. Do they really need to see another year of what they can earn before they would invest? Seems like gov giving themselves some cushion but I don't see it being necessary. Thoughts?

 

Also noticed in the inteview that he said its up to the companies to raise the money/IPO. He is only there to regulate, just like Treasury only there to protect tax payers investment. Nice way to deflect the enriching shareholders. Everyone just doing their job to protect their agency. Hopefully there is a big internal push within FnF to IPO quickly and not dick around for a year.

 

What if the commitment fee after the Senior preferred is cancelled is really high and it leaves very little profit available to common holders?

Commitment fees in the business world are usually small. They are not meant as "profit". They compensate the issuer for the opportunity cost of the funds sitting idle. They are common and make sense. They will still mean billions (low single digits) for FF.

 

I would be surprised if the commitment fee was more than 50bps.  in theory it should be zero since the US treasury is not funds constrained like a normal commitment lender, but getting away from theory, it should be a fair market fee and 50bps is within a fair range.  so $500MM per year for a $100B commitment

 

Got it. Thank you!

[Guest cherzeca]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck? (notice I didn't mention leverage)

 

It seems calabria has outlined the real plan:  it will have stages going from sweep turned off (which mnuchin has said will happen very quickly) to build capital, a negotiation between fhfa/treasury of a permanent agreement to replace conservatorship, which permits new capital raises, and eventually a return to normal operations under that agreement to implement certain operational reforms.  congress wont act but more importantly has encouraged the administration to act. collins en banc was a big win and I dont see the 5 "conservative" SCOTUS judges reversing Willett.  while calabria has never said he will sit down with Ps to settle litigation, he has said twice that most of that litigation will go away.

 

while there is much that could still go wrong (most likely imo is capital markets shut down due to negative turn in economy, maybe even a shooting war with terrorism overlay), I am having a hard time not justifying an investment at this point (forgetting that this point is 5 years and numerous court rulings too late for my taste). 

[Guest cherzeca]

comparing liquid (fnmas) and non liquid (fnmfm) issues, former trading at 19% premium to latter.  hard to justify that imo, at least at this point in the process

[Guest cherzeca]

An update in Bhatti vs. FHFA: The Eighth Circuit will hear oral argument in Bhatti v. FHFA at 9:00 a.m. on Tues., Oct. 15, 2019, in St. Paul, Minn., before Judges Lavenski R. Smith, Raymond W. Gruender and Duane Benton.

 

all 3 judges appointed by a bush

 

[Luke 532]

comparing liquid (fnmas) and non liquid (fnmfm) issues, former trading at 19% premium to latter.  hard to justify that imo, at least at this point in the process

 

Agreed.  Even if you look at it from the discount-to-par vantage point, FNMAS is still 9% higher than FNMFM (55% vs 46%).  It's even more pronounced with FMCCL which trades at 44% of par.

[Guest cherzeca]

illegal exaction claim before Sweeney gains strength from collins en banc:  https://gselinks.com/wp-content/uploads/2019/09/14-740-0049.pdf

[james22]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck?

 

You'd think. Yet the preferreds fall every day. Just rotation to commons?

[Guest cherzeca]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck?

 

You'd think. Yet the preferreds fall every day. Just rotation to commons?

 

preferreds are close to years long high, as common just hit two year high.  next milepost is the turn off the the sweep.  might be a trading opportunity if you are so inclined, buying whatever now and selling some after letter agreement re sweep. 

[orthopa]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck? (notice I didn't mention leverage)

 

It seems calabria has outlined the real plan:  it will have stages going from sweep turned off (which mnuchin has said will happen very quickly) to build capital, a negotiation between fhfa/treasury of a permanent agreement to replace conservatorship, which permits new capital raises, and eventually a return to normal operations under that agreement to implement certain operational reforms.  congress wont act but more importantly has encouraged the administration to act. collins en banc was a big win and I dont see the 5 "conservative" SCOTUS judges reversing Willett.  while calabria has never said he will sit down with Ps to settle litigation, he has said twice that most of that litigation will go away.

 

while there is much that could still go wrong (most likely imo is capital markets shut down due to negative turn in economy, maybe even a shooting war with terrorism overlay), I am having a hard time not justifying an investment at this point (forgetting that this point is 5 years and numerous court rulings too late for my taste).

 

I agree with myself and you.  ;) Again as you lay it out, and I think about it what seems to be the biggest risk is the time you maybe invested vs optimistic perception when you buy. I am loaded up pretty good so Im fine for now unless one thinks we are getting less then 50% for par....

[orthopa]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck?

 

You'd think. Yet the preferreds fall every day. Just rotation to commons?

 

Im honestly perplexed to a degree also.  Preferreds aren't much higher then back just before the Lamberth decision yet look how far we have come and where we are. Maybe it takes the NWS being off permanently or release of capital plan to see much closer to par. Either way seems like price will be up substantially overnight like after the 5th circuit ruling.

[muscleman]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck?

 

You'd think. Yet the preferreds fall every day. Just rotation to commons?

 

Im honestly perplexed to a degree also.  Preferreds aren't much higher then back just before the Lamberth decision yet look how far we have come and where we are. Maybe it takes the NWS being off permanently or release of capital plan to see much closer to par. Either way seems like price will be up substantially overnight like after the 5th circuit ruling.

 

TA hasn’t turned full bullish yet, and the ruling isn’t strong enough to disrupt TA completely like a full NWS cancellation would.

I think it’ll just be a matter of few weeks before it is ready to go, which is why I haven’t bought yet.

[orthopa]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck?

 

You'd think. Yet the preferreds fall every day. Just rotation to commons?

 

Im honestly perplexed to a degree also.  Preferreds aren't much higher then back just before the Lamberth decision yet look how far we have come and where we are. Maybe it takes the NWS being off permanently or release of capital plan to see much closer to par. Either way seems like price will be up substantially overnight like after the 5th circuit ruling.

 

TA hasn’t turned full bullish yet, and the ruling isn’t strong enough to disrupt TA completely like a full NWS cancellation would.

I think it’ll just be a matter of few weeks before it is ready to go, which is why I haven’t bought yet.

 

We will see!

[Wiggins]

Rop was filed in Michigan just prior to Bhatti being filed in Minnesota, and the two complaints are virtually identical. Rolg or others, have any idea what's going on here? If the judge is slow-walking this, how does that work exactly and when can we expect some action? Thanks

[Guest cherzeca]

Rop was filed in Michigan just prior to Bhatti being filed in Minnesota, and the two complaints are virtually identical. Rolg or others, have any idea what's going on here? If the judge is slow-walking this, how does that work exactly and when can we expect some action? Thanks

 

bhatti is being argued in 4 weeks before 8th C merits panel.  all 3 judges are bush appointees.  rop is going nowhere

[DocSnowball]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck?

 

You'd think. Yet the preferreds fall every day. Just rotation to commons?

 

Im honestly perplexed to a degree also.  Preferreds aren't much higher then back just before the Lamberth decision yet look how far we have come and where we are. Maybe it takes the NWS being off permanently or release of capital plan to see much closer to par. Either way seems like price will be up substantially overnight like after the 5th circuit ruling.

 

Personally I was disappointed that even if NWS ends, the capital retained will simply be added to the senior liquidation preference. In essence, all 100% still flows to the Treasury likely for the next couple of years. This combined with the capital raise plans being deferred to after the election is disappointing. I had loaded up my position to 20% of portfolio after Calabria's statements in the early summer about capital building and shareholders getting some conversion, but after this information have cut it down to 5% again. Surprised no one else is bothered about continued usurping of profits despite the court ruling.

[allnatural]

If there is settlement, we go to a world where the NWS never existed and therefore the liquidation preference never increased. Settlement / remedy won't recognize the increase in liq. pref. so non issue and clever workaround/interim step to retain significant capital immediately.

 

Shareholders hold great leverage after Collins and both Mnuchin and Calabria have made comments regarding lawsuits in the last week in favor of shareholders. Mnuchin said he won't let litigation stand in way of pursuing recap/release (only way that's possible is settlement) and Calabria said he isn't worried about the lawsuits bc they will take care of themselves once they do the PSPA amendment (only way that happens is if they address senior pfds).

 

Admin is pursuing a recap release and as junior pfd holder we are sitting pretty. I expect a settlement in conjunction with the PSPA amendment in the next 3-6 months. Don't overthink it at this stage :)

 

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck?

 

You'd think. Yet the preferreds fall every day. Just rotation to commons?

 

Im honestly perplexed to a degree also.  Preferreds aren't much higher then back just before the Lamberth decision yet look how far we have come and where we are. Maybe it takes the NWS being off permanently or release of capital plan to see much closer to par. Either way seems like price will be up substantially overnight like after the 5th circuit ruling.

 

Personally I was disappointed that even if NWS ends, the capital retained will simply be added to the senior liquidation preference. In essence, all 100% still flows to the Treasury likely for the next couple of years. This combined with the capital raise plans being deferred to after the election is disappointing. I had loaded up my position to 20% of portfolio after Calabria's statements in the early summer about capital building and shareholders getting some conversion, but after this information have cut it down to 5% again. Surprised no one else is bothered about continued usurping of profits despite the court ruling.

[Midas79]

If there is settlement, we go to a world where the NWS never existed and therefore the liquidation preference never increased. Settlement / remedy won't recognize the increase in liq. pref. so non issue and clever workaround/interim step to retain significant capital immediately.

 

The liquidiation preference had already hit $187B when the NWS was put into place. It has only increased twice since then, due to the 2017 tax bill forcing a DTA writedown, and the December 2017 letter agreement.

 

In a world where the NWS never happened, FnF would have most likely kept all the extra cash they made over the 10% cash dividend. I say this, rather than pay down the seniors, because I don't think the SPSPAs even allow the seniors to be paid down at FnF's (or FHFA's, in this case) discretion. The only two ways I remember seeing to pay down the seniors were if either the funding commitment was pulled (never happened) or FnF issued stock (the proceeds of which would have to go towards paying down the seniors).

 

In fact, in a world without the NWS, Treasury would have likely reinstated the commitment fee on its funding commitment because FnF would have been able to pay it. That means that the $131B that FnF would have had (total dividend payments over the 10% rate) is somewhat less.

 

Extinguishing the seniors is a way to get the cases settled without Treasury having to send out 12 figures worth of cash, but I don't think a court would have mandated that because I don't think the paydown clauses were ever challenged by the plaintiffs.

[Luke 532]

Admin is pursuing a recap release and as junior pfd holder we are sitting pretty. I expect a settlement in conjunction with the PSPA amendment in the next 3-6 months. Don't overthink it at this stage :)

 

+1

[TwoCitiesCapital]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck?

 

You'd think. Yet the preferreds fall every day. Just rotation to commons?

 

Im honestly perplexed to a degree also.  Preferreds aren't much higher then back just before the Lamberth decision yet look how far we have come and where we are. Maybe it takes the NWS being off permanently or release of capital plan to see much closer to par. Either way seems like price will be up substantially overnight like after the 5th circuit ruling.

 

Personally I was disappointed that even if NWS ends, the capital retained will simply be added to the senior liquidation preference. In essence, all 100% still flows to the Treasury likely for the next couple of years. This combined with the capital raise plans being deferred to after the election is disappointing. I had loaded up my position to 20% of portfolio after Calabria's statements in the early summer about capital building and shareholders getting some conversion, but after this information have cut it down to 5% again. Surprised no one else is bothered about continued usurping of profits despite the court ruling.

 

It's not ideal, but also can't last. Common shareholder's are NEVER going to give company new money if retained earnings simply increase government's ownership. So we know this will be ended before a capital raise.

 

Secondly, we know that litigation needs to be settled - which it won't be - if the Treasury keeps all $ past the 10% moment AND continues to usurp the value of all future retained earnings.

 

This won't stand - how it gets nullified/reversed is uncertain - but it will be nullified/reversed if we're to do a successful capital raise and we know that is the administration's goal.

 

This is definitely a situation where I'd say uncertainty =/= risk.

[Luke 532]

You probably don't do this unless you like where this situation is headed and you know your preferred shares are going through the roof... OR you're scared that your investment will tank if Trump isn't re-elected.

https://pagesix.com/2019/09/17/hedge-funder-john-paulson-to-hold-2800-per-ticket-trump-fundraiser/?utm_source=twitter_sitebuttons&utm_medium=site%20buttons&utm_campaign=site%20buttons

[rros]

are we in orthopa land where there is an effective floor for the juniors and we should back up the truck?

 

You'd think. Yet the preferreds fall every day. Just rotation to commons?

 

Im honestly perplexed to a degree also.  Preferreds aren't much higher then back just before the Lamberth decision yet look how far we have come and where we are. Maybe it takes the NWS being off permanently or release of capital plan to see much closer to par. Either way seems like price will be up substantially overnight like after the 5th circuit ruling.

 

Personally I was disappointed that even if NWS ends, the capital retained will simply be added to the senior liquidation preference. In essence, all 100% still flows to the Treasury likely for the next couple of years. This combined with the capital raise plans being deferred to after the election is disappointing. I had loaded up my position to 20% of portfolio after Calabria's statements in the early summer about capital building and shareholders getting some conversion, but after this information have cut it down to 5% again. Surprised no one else is bothered about continued usurping of profits despite the court ruling.

 

It's not ideal, but also can't last. Common shareholder's are NEVER going to give company new money if retained earnings simply increase government's ownership. So we know this will be ended before a capital raise.

 

Secondly, we know that litigation needs to be settled - which it won't be - if the Treasury keeps all $ past the 10% moment AND continues to usurp the value of all future retained earnings.

 

This won't stand - how it gets nullified/reversed is uncertain - but it will be nullified/reversed if we're to do a successful capital raise and we know that is the administration's goal.

 

This is definitely a situation where I'd say uncertainty =/= risk.

In my view, everybody knows this. Including Congress. Likely, Mnuchin and Calabaria are simply assessing how the GSE's debt market is digesting announcements and news, piecemeal. It appears it is a slow digestion process.