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

[investorG]

45pct of par after the good recent news -- wow, I guess rather than feel frustrated I should feel grateful about where the security prices would be otherwise.

[Guest cherzeca]

45pct of par after the good recent news -- wow, I guess rather than feel frustrated I should feel grateful about where the security prices would be otherwise.

 

I think this gets to the notion of "speculation" that @hardincap and I were discussing just above.  for many institutional investors speculation is a dirty word.  of course many HFs are willing to seek these out, but for the vast majority of potential investors the GSEs will only become investable when much of the speculation has been wrung out, assuming as I do that it will be wrung out.  I think the movement of the GSEs from speculation to investment has been taking far longer than I expected, which again is nothing other than a warning sign for most investors, but it seems to be gaining pace lately.  but here is my point: I expect the actual transition to investment will be a tipping point-like event, a phase change rather than a straight line progression from where we still are (speculation) to investment.  no-one can predict what (and more importantly when) would precipitate that phase change (though I have my thoughts), which again is why a lot of investors are still staying away...leading imo to excessively discounted % of par

[Spekulatius]

These two companies already have publicly available and audited financial statements. The timing to raise capital is excellent and these are large, public for decades, proven and profitable enterprises unlike momo garbage such as WeWork.

 

Once a large and reputable investment banker is selected, it won't take very long to get pieces into place as they are incentivized to get it done so they get paid.

 

Think about the Saudi Aramco IPO. It was first thought about around 4 years ago. They had no public financial statements, never been audited, never had an outside engineering firm to audit their reserves or a requirement to be public, didn't know on which exchange to list, IPO delayed due to a large petrochemical acquisition, IPO likely delayed due to poor market conditions for oil and corresponding valuation, government interference as this is their bread and butter, and on and on. Yet, they should be public in their own market by the end of this year.

 

Plus for preferred holders, you won't have to wait 4 years (which I see as excessive anyway based on above) to know your fate as a resolution should be a pre-condition to start the IPO process.

 

Cardboard

 

FWIW, there is still a GSE trading in the public markets, which may serve as a reference - Farmers Mac:

https://finance.yahoo.com/quote/AGM?p=AGM

 

The valuation is pretty undemanding.

[Guest cherzeca]

@spek

 

farmer's Mac shows a current pe of about 8.5x. moelis used a range based upon other financial institutions:  https://gsesafetyandsoundness.com/wp-content/uploads/2018/11/Blueprint-for-Restoring-Safety-and-Soundness-to-the-GSEs-Final.pdf. p.27

[Luke 532]

Live event going on now at GMU (Fairfax, VA... about an hour outside of Washington, DC).

 

In discussion at @MasonLEC, @FHFA Director @MarkCalabria publicly indicated #GSEs could leave conservatorship before hitting top capital threshold and operate under consent decree.

[Guest cherzeca]

Live event going on now at GMU (Fairfax, VA... about an hour outside of Washington, DC).

 

In discussion at @MasonLEC, @FHFA Director @MarkCalabria publicly indicated #GSEs could leave conservatorship before hitting top capital threshold and operate under consent decree.

 

this is smart and reassuring. 

[Spekulatius]

@spek

 

farmer's Mac shows a current pe of about 8.5x. moelis used a range based upon other financial institutions:  https://gsesafetyandsoundness.com/wp-content/uploads/2018/11/Blueprint-for-Restoring-Safety-and-Soundness-to-the-GSEs-Final.pdf. p.27

 

Farmers Mac isn’t really the same business model, it’s income mostly comes from the net interest margin, while the GSE would be 2/3 fees and 1/3 interest income (roughly)

 

The GSE would have a more stable income stream, specially in a low interest rate environment. AGM stock only took off after interest rates came off from zero.

[Luke 532]

Calabria hopes to have adviser in place by November. Attached...

[Cox022]

Thanks for the bloomberg screenshot.

 

I cant help but notice it reads that the GSE's 'might have to operate under consent decrees.'  If that is in fact a quote, I wonder under what circumstances would the GSE's 'have' to operate under consent decrees. 

 

My first reaction is that this indicates Calabria is in a hurry, but I'm not 100% sure if I'm thinking about that correctly yet.

 

The wording of the ACG analytics tweet is different by suggesting they 'could' be released with a consent decree.

 

I'm reading too much into it but I guess I'm just antsy for useful information!

[Guest cherzeca]

@spek

 

farmer's Mac shows a current pe of about 8.5x. moelis used a range based upon other financial institutions:  https://gsesafetyandsoundness.com/wp-content/uploads/2018/11/Blueprint-for-Restoring-Safety-and-Soundness-to-the-GSEs-Final.pdf. p.27

 

Farmers Mac isn’t really the same business model, it’s income mostly comes from the net interest margin, while the GSE would be 2/3 fees and 1/3 interest income (roughly)

 

The GSE would have a more stable income stream, specially in a low interest rate environment. AGM stock only took off after interest rates came off from zero.

 

I expect g fees will be much more than 2/3 of income going forward

[allnatural]

FHFA is reviewing a host of options to make Fannie and Freddie more profitable because the companies have to be attractive to potential investors in order to have successful share offerings, Calabria says

 

FHFA hopes to have hired a financial adviser to offer expertise on Fannie and Freddie by the end of November, if not sooner, he says

[Guest cherzeca]

"FHFA is reviewing a host of options to make Fannie and Freddie more profitable because the companies have to be attractive to potential investors in order to have successful share offerings, Calabria says"

 

earth to Calabria:  the GSEs are very profitable corps as they are.  they can become more profitable on a per share basis to potential investors if treasury kills some warrants. 

[allnatural]

He can start by discontinuing to issue value destructive CRTs

[DRValue]

He can start by discontinuing to issue value destructive CRTs

 

Pursuing more profitability is a huge deal.

[Guest cherzeca]

He can start by discontinuing to issue value destructive CRTs

 

Pursuing more profitability is a huge deal.

 

Agree. First time Calabria has said something that might actually help rather than hurt an offering. Must be talking to bankers

[orthopa]

IMO I think the fact he even mentions the consent decrees means they will. If not needed, why even mention it? I think calabria continues to under promise but at some point will over deliver.

 

What are your guys interpretations of the retained earnings projections? 9-18 months but when does the time period start? The latest batch of retained earnings is from Q2 so are we already at 4 months of retained earnings? 9 months is 3 quarters and we are already on the second quarter of retained earnings in a couple weeks.

 

Next is obviously 4th amendment and capital rule but what gets GSEs to point capital wise to operate under a consent decree sooner? Private placement?

[Guest cherzeca]

@orthopa

 

I think fhfa and treasury have been sounding out the bankers more than they are letting on.

 

first, the whole notion of transitioning out of conservatorship and into consent decree in connection with an offering.  no new investors want to put money into a conservatorship-run issuer...lest that Lazarus Parrott reemerges. 

 

second, laying groundwork for some retained earnings capital before the first offering.  bankers said there should be a small cushion before any new investors jump into the pool. how many Qs? depends on market conditions.

 

third, calabria just mentioned improving GSE profits.  he doesn't know profits from Adam, he is an economist.  some adult banker told him stop talking about reducing footprints and increasing competition.

 

the sense I am getting is some banker collared calabria before it was too late...thankfully

 

 

[allnatural]

Looking to make the GSEs more profitable in order to for them to be attractive to potential investors is a very important statement from Calabria as it is a 180 change from his previous views.

 

Twice in the past 1-2 months when he was asked about how the GSEs will attract investors while simultaneously making them less attractive via reducing their footprints, Calabria said that's not his problem, but for Fannie and Freddie to figure out. All of a sudden the FHFA itself is looking at how to make the GSEs more profitable specifically so they will be attractive to potential investors... Seems like someone told him it IS his problem to figure out.

[Williams406]

"...Calabria said that's not his problem, but for Fannie and Freddie to figure out."

 

Over the past month, in spite of developments that are on the right track, this attitude from Calabria has given me pause/driven me nuts. His agency did this to the GSE's, even if HE didn't. Very glad to see the apparent adjustment. As cherzeca speculates, likely due to bankers giving him the what for.

[rros]

@orthopa

 

I think fhfa and treasury have been sounding out the bankers more than they are letting on.

 

first, the whole notion of transitioning out of conservatorship and into consent decree in connection with an offering.  no new investors want to put money into a conservatorship-run issuer...lest that Lazarus Parrott reemerges. 

 

second, laying groundwork for some retained earnings capital before the first offering.  bankers said there should be a small cushion before any new investors jump into the pool. how many Qs? depends on market conditions.

 

third, calabria just mentioned improving GSE profits.  he doesn't know profits from Adam, he is an economist.  some adult banker told him stop talking about reducing footprints and increasing competition.

 

the sense I am getting is some banker collared calabria before it was too late...thankfully

I have a slightly darker take. During the summer Calabria backed off big time. Whether it was the GSEs debt spreads widening or perhaps them realizing there was no appetite for an immediate IPO, delaying and more work was in order.

 

Could be bankers suggesting a better road map. Or simply their own stark realization that taking them private is more difficult than anticipated what is leading to "consent decrees, improved earnings, etc." trial balloons. If the latter, them realizing the road to an IPO is tough the danger lies in arriving at the wrong diagnose. LocusofTexas words come to mind: "shoddy treatment of past investors" may be just the only reason for new investors' cold feet.

[Guest cherzeca]

@rros

 

it would have been prudent for fhfa/treasury to sound out bankers about what they thought was achievable and for free advice. I expect they did so, and what they heard back was that you can't issue new shares unless there is already some capital cushion, and the GSEs must be out of conservatorship when they do (of course unless SCOTUS affirms the willett opinion beforehand). and oh by the way, enough of the talk about making the GSEs less profitable though competition and footprint reduction.

 

this is all good and as I have said somewhat reassuring to me.

[rros]

@rros

 

it would have been prudent for fhfa/treasury to sound out bankers about what they thought was achievable and for free advice. I expect they did so, and what they heard back was that you can't issue new shares unless there is already some capital cushion, and the GSEs must be out of conservatorship when they do (of course unless SCOTUS affirms the willett opinion beforehand). and oh by the way, enough of the talk about making the GSEs less profitable though competition and footprint reduction.

 

this is all good and as I have said somewhat reassuring to me.

I agree that they may have consulted VIPs and may have heard some proper advise. All constructive from the sell-side. But the bankers they may have consulted with may not be the same end-user that will be funding an IPO (final investors buying shares).

 

It is in this last part of the equation that the question mark arises: will there be anybody willing to buy these companies when -even today- Treasury is not backing down from their horrible treatment of investors? I did cut my stake during the summer and I now keep a smaller chunk for the long-haul (after holding steady for 9 years). My message today to Treasury is "f*** ***".

[Guest cherzeca]

@rros

 

"will there be anybody willing to buy these companies when -even today- Treasury is not backing down from their horrible treatment of investors?"

 

this is the crux of the issue going forward and I have given some thought to it.  where I came out is that investors should appreciate that the "superpower" for evil exhibited in connection with the NWS was attributable to conservatorship and, of course, was not even a proper superpower assuming that collins en banc is not overturned by SCOTUS.  so any course of action going forward needs to get the GSEs out of conservatorship prior to any offering, and I was pleased to see that fhfa is planning for this with its "consent decree" phase.  the other issue is how much if anything will Treasury keep of its senior pref, and what it does with its warrants.  while Bove made much of the increasing senior pref amount in connection with the letter agt halt to the sweep, I cant imagine that Treasury would have done it differently, for that would be tantamount to a deal to reduce the senior pref, and that is a deal done with Ps in settlement of the litigation.  so while I have no love loss for the govt in this saga, I dont sent see it acting in ways now that are adverse to a potential recap...it's all just going to take longer than we would like

[rros]

@rros

 

"will there be anybody willing to buy these companies when -even today- Treasury is not backing down from their horrible treatment of investors?"

 

this is the crux of the issue going forward and I have given some thought to it.  where I came out is that investors should appreciate that the "superpower" for evil exhibited in connection with the NWS was attributable to conservatorship and, of course, was not even a proper superpower assuming that collins en banc is not overturned by SCOTUS.  so any course of action going forward needs to get the GSEs out of conservatorship prior to any offering, and I was pleased to see that fhfa is planning for this with its "consent decree" phase.  the other issue is how much if anything will Treasury keep of its senior pref, and what it does with its warrants.  while Bove made much of the increasing senior pref amount in connection with the letter agt halt to the sweep, I cant imagine that Treasury would have done it differently, for that would be tantamount to a deal to reduce the senior pref, and that is a deal done with Ps in settlement of the litigation.  so while I have no love loss for the govt in this saga, I dont sent see it acting in ways now that are adverse to a potential recap...it's all just going to take longer than we would like

No, not adverse. Recap is coming one way or another. I agree again with your points but that bitter after-taste remains. Unless there is a last minute saving grace. Like Trump issuing an eo cancelling them out completely right before they have all ipo ducks in a row.

 

Given the last JumpStart included an express prohibition to the Admin to take any such action I believe it is entirely within his power. Or Treasury's. Although I am sure Trump would love to sign this and Mnuchin will more than oblige.

[Luke 532]

Tomorrow...

 

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