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

[allnatural]

Full quote:@CGasparino on @FoxBusiness: @MarkCalabria in response to question on potential of Pres. Warren directing no release: "I'm an independent regulator... we're going to get them out of conservatorship; if you don't like it, change the law."

 

Unfortunately for Calabria SCOTUS is going to rule this term that he may be fired @ will going forward. So Warren doesnt have to change the law, just replace Calabria. He has to be aware of that correct? Hopefully he has a sense of urgency with that in mind. It is nice to see he upped his exit timeline from "5 years" this summer to "by 2021" as per this interview.

[Luke 532]

SCOOP: In an exclusive interview w @FoxBusiness @MarkCalabria says it doesnt matter who is president, he will be looking to release GSE's from government control in 2021; says opposition from a Dem like @ewarren would be ignored more at 130 w @TeamCavuto $FMCC $FNMA @FannieMae

 

Video: https://video.foxbusiness.com/v/6100433182001/#sp=show-clips

[Guest cherzeca]

calabria knows that removal for cause only will be invalidated though since it hasn't yet he will keep to his guns.  but if this transition from conservatorship to consent decree is a real option, then he can always get the consent decree drafted and ready to go in January 2021, assuming the GSEs are doing well at building/raising capital

[Mephistopheles]

It's obvious these are going to raise capital and be released from conservatorship. It appears that it also needs to be ready to go by early 2021 in case Trump loses.

 

They can either 1) be fair to shareholders and also maximize the value of the warrants or 2) give the companies away to John Paulson, Buffett and co.

 

In the second scenario the new owners will get all the legal liabilities from legacy shareholders plus all the negative press. Also this sort of corruption can only hurt Trump, I imagine, in an election year. It would be equivalent to post Soviet Russia when the Oligarchs got ownership of the major corporations. Plus in this case Trump would want to hide the deal from the press and this means he wouldn't get to brag about all the money he made for Taxpayers via the warrants.

 

So it may be easier just to play it fair and then Trump gets the bragging rights for the warrants. Thoughts?

[investorG]

SCOOP: In an exclusive interview w @FoxBusiness @MarkCalabria says it doesnt matter who is president, he will be looking to release GSE's from government control in 2021; says opposition from a Dem like @ewarren would be ignored more at 130 w @TeamCavuto $FMCC $FNMA @FannieMae

 

Video: https://video.foxbusiness.com/v/6100433182001/#sp=show-clips

 

thanks. he was nearly asking for private investment / placement in 2020.  IMO this is necessary, the consent decree arena is a little messy and probably a backup, if that.  It's hard at best to potentially raise 50-100bn at once in a re-IPO.  Also, it makes it easier to possibly write down the sr pref (most or all) if it's done in conjunction with a large private equity injection (i.e. it was necessary to get the $ and probably would involve legal settlements).  The opposing view to this is the real chance that the SC takes up the APA and we wait until June for direction. 

 

good luck everyone.

[Guest cherzeca]

"They can either 1) be fair to shareholders and also maximize the value of the warrants or 2) give the companies away to John Paulson, Buffett and co."

 

way too simplistic.  the market will determine offering price and I expect a large offering will result in a depressed offering price.  that should improve the exchange ratio for the junior preferred.  so if junior preferred holders do well, this will be because of the market, not because of trump or Paulson.

 

@IG

 

the consent decree is necessary.  GSEs likely wont raise enough money to meet capital rule after first offering.  and the new shareholders in the first offering will insist that the GSEs are no longer in conservatorship when that first offering closes.  hence a bridge to full escape after likely additional offerings that meet capital rule.

[Gregmal]

Doesnt the idea of injecting capital(raising) conflict with the idea of either wiping out, or paying out existing securities? I would think in order for the new capital to make sense within the parameters of all that is part of this equation(congress and the appearance of enriching Hf's) you simply need to collapse the legacy securities into common(something thats been discussed) and thats really it. Its simple, and everything else is too messy. You cant raise capital to pay out a settlement given the political noise that would create. And you cant raise new capital after wiping out the old. They also need to move fast(re:not complicated and drawn out). Say what you want, but the current system still works fine even while common and pref continued to get screwed, and if there is one super, duper, easy piece of meat for a newly elected socialist to throw their constituents, it would be to put the kibosh on a "hedge fund pay day"....easily doable with an executive order or by re appointing her people.

[Mephistopheles]

"They can either 1) be fair to shareholders and also maximize the value of the warrants or 2) give the companies away to John Paulson, Buffett and co."

 

way too simplistic.  the market will determine offering price and I expect a large offering will result in a depressed offering price.  that should improve the exchange ratio for the junior preferred.  so if junior preferred holders do well, this will be because of the market, not because of trump or Paulson.

 

 

Agreed that this the junior conversion scenario is normally how things are determined. But I am thinking of worst case scenario. ie wiping out existing shareholders, junior holders and giving 100% of the company to new holders. Maybe I'm too cynical but are they capable of doing that and if so what would stop them?

[Guest cherzeca]

"They can either 1) be fair to shareholders and also maximize the value of the warrants or 2) give the companies away to John Paulson, Buffett and co."

 

way too simplistic.  the market will determine offering price and I expect a large offering will result in a depressed offering price.  that should improve the exchange ratio for the junior preferred.  so if junior preferred holders do well, this will be because of the market, not because of trump or Paulson.

 

 

Agreed that this the junior conversion scenario is normally how things are determined. But I am thinking of worst case scenario. ie wiping out existing shareholders, junior holders and giving 100% of the company to new holders. Maybe I'm too cynical but are they capable of doing that and if so what would stop them?

 

this wont happen.  a lot of the new holders would be kindred spirits, if not the same spirits, as the old holders

[SnarkyPuppy]

"They can either 1) be fair to shareholders and also maximize the value of the warrants or 2) give the companies away to John Paulson, Buffett and co."

 

way too simplistic.  the market will determine offering price and I expect a large offering will result in a depressed offering price.  that should improve the exchange ratio for the junior preferred.  so if junior preferred holders do well, this will be because of the market, not because of trump or Paulson.

 

 

Agreed that this the junior conversion scenario is normally how things are determined. But I am thinking of worst case scenario. ie wiping out existing shareholders, junior holders and giving 100% of the company to new holders. Maybe I'm too cynical but are they capable of doing that and if so what would stop them?

 

This scenario does not remove the significant contingent liability for the companies resulting from the ongoing jr pref lawsuits. 

 

The easiest solution continues to be significantly diluting the existing common shares + eliminating the lawsuits through natural course of action (= ending nws (done) + eliminating SPS preference + either converting jr pref at fair terms or keeping them in the stack).  Win + win. 

 

I'd imagine if raising private capital through an IPO has operational risk (it does), then eliminating the lawsuits would be a necessary requirement in reducing that risk (elimination of contingent liability)

[WB_fan82]

I think it's smart to think through the receivership scenarios.

 

On the one hand, it's a possible rinsing of the legal liabilities.  That's about the only positive I can see.  That could make it easier for the successor entity to raise capital.

 

On the other hand, it doesn't comport well with the change to the NWS.  All of the ongoing retained earnings / capital is an increase in the sr. liquidation preference.  If they enter rship, that retained capital would sit in the old company.  It wouldn't help at all with the new company b/c the r-ship regime doesn't allow the capital / equity to transfer over.

 

Whereas if they keep status quo in c-ship, all of that retained capital is building a reservoir that can be tapped in the future by amending the terms of the sr. preferred to qualify as capital or to exchange into capital (common or even other pfd).

 

Also, can Calabria even push them into r-ship at this point?  IIRC, HERA says they have to be insolvent to be put into r-ship and the companies are far away from that and every day of retained capital is another step away from the insolvency cliff (and they are already half a mile away from the edge).

 

R-ship seems to me to be the only major downside scenario, so would appreciate feedback on thinking through this possibility.

[Guest cherzeca]

receivership is not possible under HERA for companies generating many $Bs of cash flow.  talk of receivership is fake news

[Luke 532]

receivership is not possible under HERA for companies generating many $Bs of cash flow.  talk of receivership is fake news

 

+1.  On my list of bearish events I have a nuclear bomb being dropped on Fannie headquarters rated as more likely than receivership.

[Guest cherzeca]

there is a difference between inverting and gibberish.

[WB_fan82]

Reading HERA, I see two ways they can be put into receivership without being insolvent:

 

1.  Consent via a resolution of the GSE board of directors.

 

2.  Has no reasonable prospect of becoming adequately capitalized.

 

#2 is probably in abeyance until the capital rules are published.  But looking ahead, the sr pref does not qualify as capital under the definitions.  So unless TSY is willing to change the terms, r-ship would be on the table, maybe even required.  Because the NWS retention by increasing the sr. pref balance would never be progress towards adequate capitalization.

 

I'm not saying TSY would actually want to force them into r-ship.  Whether that up/down equation makes sense for them is a different subject.  I'm just trying to see the paths to even get to that consideration.

 

BTW, if they do go into r-ship, who owns the equity in the new LLRE?  TSY or FHFA?

[DRValue]

Ackman talking book on commons again.

 

https://seekingalpha.com/article/4302326-pershing-square-holdings-ltd-pshzf-ceo-william-ackman-q3-2019-results-earnings-call

 

He mentions that he believes prefs are shifting to common. I would hope he has evidence of this before disclosing on an earnings call. Even aside from that you'd think this wouldn't just be assumed but known by him, to base his decisions on.

[Guest cherzeca]

@WB

 

fair point, although I still question as a matter of statutory interpretation whether fhfa director can make a discretionary appointment as receiver after he has made a discretionary appointment of conservator...in other words, do you have to go to the mandatory receivership section once you have elected to go first to conservator?  if so, that is far more restrictive. 

[Guest cherzeca]

Ackman talking book on commons again.

 

https://seekingalpha.com/article/4302326-pershing-square-holdings-ltd-pshzf-ceo-william-ackman-q3-2019-results-earnings-call

 

He mentions that he believes prefs are shifting to common. I would hope he has evidence of this before disclosing on an earnings call. Even aside from that you'd think this wouldn't just be assumed but known by him, to base his decisions on.

 

I found that to be a curious assertion, especially from a guy who has admitted that he has hedged his very large common position by buying prefs.  it seems to me that any preference of common over preferred would have to assume that the juniors and seniors and warrants are treated in a certain way...and all of that is still up in the air

[orthopa]

FWIW I dont think it makes a lot of sense to worry about receivership as 1. It will not happen, 2. Once we found out likely after market hours of weekend we would probably be down nearly 100% once the market opened so the information advantage or knowledge of such once it got to us via media etc would useless.

 

What I have been thinking about is that I was always thought treasury would dictate how the Jr Preferred shares are treated but I think now that is not be the case. They certainly have full say over the warrants and Sr Preferred shares but depending on the time line and what happens they may not at all. There is an assumed settlement with plantiffs over the NWS/ overpayments but that settlement should not deal with what will happen with the Jr Preferred in a recap. The assumption is once the final PSPA agreement is done it will include some final treatment/conversion/cancelling of the Sr Preferred. When that comes to fruition if the Jr preferred have not been converted to common it is FHFA(overseeing) FNF that will determine the outcome as Calabria has said that they will figure out how to go to market/raise money/recap etc.

 

I guess my point is the lawsuits deal with the NWS and overpayments not final treatment for Jr Preferred/conversion decision or ratio etc. Treasury could settle with plantiffs, say hypothetically Sr Preferred cancelled and 10B tax credit given. Treasury is much more so out of the picture then as their skin in the game are the warrants only. Its really Fannie/Freddies advisor that is going to determine the Jr Preferred's fate. FHFA will have their adviser too of course but my feel is that will be more so to guide the appropriateness of what options Fannie/Freddie have from a conservator standpoint.

 

Lots of moving pieces for sure and the timing will dictate everything but our final treatment IMO really is in the hands of the adviser that Fannie hires and their input over what a recap should look like.

[orthopa]

Thinking about this more from a capital structure standpoint, how much influence does a majority shareholder of common have over a higher class of security (Jr Preferred) in a recap? Could treasury put the nix on a favorable conversion ratio of preferred to common in a recap?

[Guest cherzeca]

@orthopa

 

I have found that negotiations are more likely to be effective if you put all of the issues on the table and try to resolve them all at same time. I could push on a point in issue A and you can resist but be more willing to give on a point on issue B. And so on. If govt and Ps are smart they will do one mother of all negotiations

[Guest cherzeca]

@orthopa

 

"Treasury is much more so out of the picture then as their skin in the game are the warrants only. Its really Fannie/Freddies advisor that is going to determine the Jr Preferred's fate. FHFA will have their adviser too of course but my feel is that will be more so to guide the appropriateness of what options Fannie/Freddie have from a conservator standpoint."

 

I agree wholeheartedly with this.  this is why the retention of financial advisors is so important for the process to accelerate and get executed.  everyone focuses on the Ps, common , juniors, treasury and FHFA. all true.  the big gorilla at the table is the market, what it will take in terms of capital structure and pricing to raise the necessary new capital.  the market will tell us this, and the financial advisors will take the pulse from the market and tell all the parties what is doable.  the parties can't do what is not doable in the market (as WeWork found out).

 

perhaps I am reading between the lines too much but it seems to me that Calabria understands this.

[fanniequestions]

As of now, a new president may be able to replace Calabria.  It’s strange to me that the director is silent on senior preferred warrants because although it’s Treasuries’, it’s still a huge factor on the marketability of the GSEs in the secondary market.  Is it because Mnuchin/Calabria are holding $20b+ as leverage in case Trump does not win.  If Calabria is en route to be fired, then they cancel the warrants and bye bye $, which would expedite capital raise, and recap anyways...or they can cooperate and exercise the warrants and be a large help in contributing to fund socialist promises.  This way Calabria can finish his job regardless.  Am I even making sense?  Thoughts?

[investorG]

Calabria, to date has been the reverse of typical:  solid action, erratic talk. 

 

I'd rather that than the reverse and so I'll root for more of the same despite its uncomfortableness.

 

Good luck everyone!

[Guest cherzeca]

Calabria, to date has been the reverse of typical:  solid action, erratic talk. 

 

I'd rather that than the reverse and so I'll root for more of the same despite its uncomfortableness.

 

Good luck everyone!

 

I will feel a whole lot better about calabria once fhfa hires its financial advisor.