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

[Guest cherzeca]

and while calabria gives too many talks and is too slow, doing a recalibration of the capital rule with a financial advisor on board makes a whole lot of sense

 

Has FHFA hired its financial advisor yet?

 

I have been looking for announcement since I am curious, but haven't seen it...should be soon

[investorG]

For those still excited about the near term outlook -- what specific catalyst do you see? 

 

The catalyst I see is the only one that really matters to pref holders: settlement.  Can happen at any moment without warning.

 

Thanks, Luke.  Sure, it's possible.  But not likely over the near term.  First, there's waiting for the SC ruling on whether it takes Collins.  Second, why slow play the capital rule finalization (post comments) until 2h 2020+ if you intend to settle in 1h 2020?  Calabria's more talented than taking 15 months from his start to get the capital rule in place -- it's clear to me that he's been told to slow play. 

 

Trump probably sided with the Kudlow and political wing during the summer.  I'm guessing Calabria is sympathetic to us and has tried to soften the timing delay announcements over the past 2 weeks by a) including consent decree statement last week and b) scheduling the capital rule disappointment on same day of what he perhaps hoped was a good day with Sweeney. 

 

Our response due to the SC in Collins next Friday should be interesting.  I wonder if our lawyers have tilted towards the higher risk higher potential reward outcome of directly or indirectly asking the SC to take the APA (and constitutional).

[SnarkyPuppy]

For those still excited about the near term outlook -- what specific catalyst do you see? 

 

The catalyst I see is the only one that really matters to pref holders: settlement.  Can happen at any moment without warning.

 

Thanks, Luke.  Sure, it's possible.  But not likely over the near term.  First, there's waiting for the SC ruling on whether it takes Collins.  Second, why slow play the capital rule finalization (post comments) until 2h 2020+ if you intend to settle in 1h 2020?  Calabria's more talented than taking 15 months from his start to get the capital rule in place -- it's clear to me that he's been told to slow play. 

 

Trump probably sided with the Kudlow and political wing during the summer.  I'm guessing Calabria is sympathetic to us and has tried to soften the timing delay announcements over the past 2 weeks by a) including consent decree statement last week and b) scheduling the capital rule disappointment on same day of what he perhaps hoped was a good day with Sweeney. 

 

Our response due to the SC in Collins next Friday should be interesting.  I wonder if our lawyers have tilted towards the higher risk higher potential reward outcome of directly or indirectly asking the SC to take the APA (and constitutional).

 

Can you help me understand why any of this matters in the end?  Maybe it gets addressed in 2021 instead of 2020.  Has anything about the end game changed?  Maybe I’m missing something.  Obviously sooner the better but the IRR at current prices is attractive under essentially any timeline. 

 

The only tangible risk of delay that seems reasonable to me is the passage of time increases a risk of an acute downturn in credit markets which impacts IPO process

[allnatural]

Bloomberg analyst attended the Sweeney hearing yesterday. He thinks shareholders are favored and the case will most likely proceed on multiple claims (flipped his view from last time) and we could see a ruling as soon as year end as Sweeney said she already had a draft ruling ready. https://m.imgur.com/a/ek0S9Q8

[Luke 532]

For those still excited about the near term outlook -- what specific catalyst do you see? 

 

The catalyst I see is the only one that really matters to pref holders: settlement.  Can happen at any moment without warning.

 

Thanks, Luke.  Sure, it's possible.  But not likely over the near term.  First, there's waiting for the SC ruling on whether it takes Collins.  Second, why slow play the capital rule finalization (post comments) until 2h 2020+ if you intend to settle in 1h 2020?  Calabria's more talented than taking 15 months from his start to get the capital rule in place -- it's clear to me that he's been told to slow play. 

 

Trump probably sided with the Kudlow and political wing during the summer.  I'm guessing Calabria is sympathetic to us and has tried to soften the timing delay announcements over the past 2 weeks by a) including consent decree statement last week and b) scheduling the capital rule disappointment on same day of what he perhaps hoped was a good day with Sweeney. 

 

Our response due to the SC in Collins next Friday should be interesting.  I wonder if our lawyers have tilted towards the higher risk higher potential reward outcome of directly or indirectly asking the SC to take the APA (and constitutional).

 

Settlement doesn't have to wait for anything else to happen. There are no prerequisites to a settlement. It can happen at any moment.

[Luke 532]

The only tangible risk of delay that seems reasonable to me is the passage of time increases a risk of an acute downturn in credit markets which impacts IPO process

 

I'd love to hear responses to this as I have a very similar viewpoint to Snarky.

[onyx1]

..why slow play the capital rule finalization (post comments) until 2h 2020+ if you intend to settle in 1h 2020? 

 

I don't see the capital rule slowing anything.  The critical path is the time to accumulate retained earnings that will take us to the end of 2020.  Also, UST is taking the lead in the settlement talks so I don't see how FHFA could have specific intention on timing.

[Luke 532]

Bloomberg analyst attended the Sweeney hearing yesterday. He thinks shareholders are favored and the case will most likely proceed on multiple claims (flipped his view from last time) and we could see a ruling as soon as year end as Sweeney said she already had a draft ruling ready. https://m.imgur.com/a/ek0S9Q8

 

Good read from Bloomberg Intelligence.  Thanks for posting, allnatural.

[DRValue]

For those still excited about the near term outlook -- what specific catalyst do you see? 

 

The catalyst I see is the only one that really matters to pref holders: settlement.  Can happen at any moment without warning.

 

I cannot wait to listen to the hearing! Wonder if all those that sold will be caught out by an earlier than expected ruling?

 

Timing wise it smacks of political influence to me though.

[Guest cherzeca]

Bloomberg analyst attended the Sweeney hearing yesterday. He thinks shareholders are favored and the case will most likely proceed on multiple claims (flipped his view from last time) and we could see a ruling as soon as year end as Sweeney said she already had a draft ruling ready. https://m.imgur.com/a/ek0S9Q8

 

thanks for posting allnatural.  if this comes to pass, very favorable.  as to whether subsequent-to-NWS stockholders acquire litigation standing when they acquire shares, it is not surprising that this might be undecided in ct of fed claims in the takings area, as there haven't been many transactions affecting stock like the NWS, to say the least.  Sweeney "should" be able to handle that question as the injury done by the NWS is done with respect to the share rights that the shares confer on the shareholder so that the identity of the shareholder should not matter, but she may feel better if the appeals court handles it (I mean, trial courts should be able to handle novel questions in the first instance knowing there is opportunity for review).  so either way, there is treasury exposure going forward, but much more damages potential if all current shareholders have standing.

[allnatural]

W/ Sweeney there are two separate claims being made. 1) Derivative claim, if Ps win that it would be the same as winning the APA claims, excess payments would flow back to the GSEs or a write down of the senior pfds. In this situation the claims traveling issue isn't relevant. 2) Direct claim, if Ps win here, whether claims travel or not matters. Luckily for us I believe this is already established law w/ securities, and if she asks the district court to opine, Lambert already ruled on this issue last year. He made it clear all claims travel (see bottom of page 17 from last years ruling, https://gofile.io/?c=z5mtXw). Ps can further argue that every NWS payment since 2012 is a new takings if it really comes to that. I wouldn't lose sleep over the claims question.

 

 

Bloomberg analyst attended the Sweeney hearing yesterday. He thinks shareholders are favored and the case will most likely proceed on multiple claims (flipped his view from last time) and we could see a ruling as soon as year end as Sweeney said she already had a draft ruling ready. https://m.imgur.com/a/ek0S9Q8

 

thanks for posting allnatural.  if this comes to pass, very favorable.  as to whether subsequent-to-NWS stockholders acquire litigation standing when they acquire shares, it is not surprising that this might be undecided in ct of fed claims in the takings area, as there haven't been many transactions affecting stock like the NWS, to say the least.  Sweeney "should" be able to handle that question as the injury done by the NWS is done with respect to the share rights that the shares confer on the shareholder so that the identity of the shareholder should not matter, but she may feel better if the appeals court handles it (I mean, trial courts should be able to handle novel questions in the first instance knowing there is opportunity for review).  so either way, there is treasury exposure going forward, but much more damages potential if all current shareholders have standing.

[Guest cherzeca]

@allnatural

 

as to derivative claim, you are quite right. full damages flowing back to corps.  problem with derivative claim is that it is clear this claim is cut off by the the successor clause of HERA. now there should be an exception where the conservator as "successor in interest to the shareholders with respect to the corporations and its assets" has a manifest conflict of interest (on these facts the Delaware chancery court would have no trouble making that holding). whether a ct of fed claims makes this exception is another matter (in essence, it is different for a govt branch like judiciary to tell another govt branch like executive that it has a conflict of interest than it is for a judicial branch to tell a private corporate board the same thing...litigating against the govt has sharpened my cynical bones).

 

as for the direct claim, I agree that Lamberth so held but that was with respect to Delaware corporate law.  does ct of fed claims apply Delaware law in the takings area? it should, and for all armchair lawyers, federal courts should apply state law (corporate law re shares) unless a federal statute supplants it.

 

so yes allnatural, everything you say makes sense, but I am just more than once bitten...

[orthopa]

The only tangible risk of delay that seems reasonable to me is the passage of time increases a risk of an acute downturn in credit markets which impacts IPO process

 

I'd love to hear responses to this as I have a very similar viewpoint to Snarky.

 

I agree and cherzeca's phrase was dead on. Uncertainty/timing has increased a bit, risk has not. People just don't want to wait and I think many are jittery holding something like this so any news viewed as unfavorable and they bolt.

 

As far as settlement my thought is that this will likely happen with a PSPA agreement, likely a final one as it would set the path for a dealing with the Sr Preferred being paid down +/- any overages and allowing capital to come in without the overhang. Unless a court forces otherwise sooner and puts treasury at immediate risk I dont know why they would settle? Right now Treasury still has the leverage with the Sr Preferred, the increasing liquidation preference and a court system that is slow and really has not put the screws to them yet.

 

In regards to a settlement I don't think you get more then par for preferred this avenue unless $$$ is returned and earmarked specifically for dividends. If history means anything a tax credit or the money going towards recap is what would be done and I dont see the avenue for preferred getting more then par that way.  The opportunity for more then par for the Jr preferred will come in the recap plan from the financial adviser approved by FHFA via a favorable conversion etc. The financial advisers in reality can't submit a capital restoration plan until the Sr. preferred's ultimate fate is known. Once the happens by my logic treasury is out of the picture negotiation wise and has no control over preferred getting par or not.

[Luke 532]

I should clarify that "near-term" means to me by the end of the first half of 2020 (could be tomorrow, next week, 6 months from now, etc.).  I do think a settlement has a really good chance of happening between now and then for a variety of reasons that others and I have discussed on the board, including recent comments by Phillips two weeks ago that unfortunately I've been asked not to share. 

[Guest cherzeca]

@orthopa

 

I agree that par for juniors is high water mark on any exchange, but once financial advisors are retained, I expect they will inquire as to doing a rights offering to existing shareholders, something that Ackman and others have mentioned and that makes sense before going out to new investors...and rights offerings are usually done at a discount in order to entice shareholders to exercise their rights

[allnatural]

Calabria last month also said this: Re-proposal would delay final rule until "spring" and "closer to May;" also said that capital rule & PSPA would be done "hopefully middle of next year." "Capital rule... on its own timeline... changes to PSPA... on its own timeline... hopefully be done by the middle of next year"

 

So capital rule and PSPA to be completed by middle of next year and are independent of each other. Now whether you want to take his word at face value is up to you as he is losing credibility by the day.

[Midas79]

Can you help me understand why any of this matters in the end?  Maybe it gets addressed in 2021 instead of 2020.  Has anything about the end game changed?  Maybe I’m missing something.  Obviously sooner the better but the IRR at current prices is attractive under essentially any timeline. 

 

The only tangible risk of delay that seems reasonable to me is the passage of time increases a risk of an acute downturn in credit markets which impacts IPO process

 

I'm still scared of election risk, especially since a new president would be able to replace Calabria. I think it was one of the IMF pieces that said there is no such thing as a permanent consent decree. The FHFA director and Treasury Secretary, together, have a ton of power. I don't know if it's even possible for Calabria and Mnuchin to do anything that their replacements can't undo, other than release with the consent decree. Even then, FnF will remain under pretty tight regulatory control until they meet FHFA's capital requirements in full. A new director could just increase the requirements so much that FnF remain in limbo indefinitely.     

[Midas79]

@orthopa

 

I agree that par for juniors is high water mark on any exchange, but once financial advisors are retained, I expect they will inquire as to doing a rights offering to existing shareholders, something that Ackman and others have mentioned and that makes sense before going out to new investors...and rights offerings are usually done at a discount in order to entice shareholders to exercise their rights

 

What exactly would a rights offering entail? Would it require the recipients of the offering to put up more money?

[Luke 532]

Calabria last month also said this: Re-proposal would delay final rule until "spring" and "closer to May;" also said that capital rule & PSPA would be done "hopefully middle of next year." "Capital rule... on its own timeline... changes to PSPA... on its own timeline... hopefully be done by the middle of next year"

 

So capital rule and PSPA to be completed by middle of next year and are independent of each other. Now whether you want to take his word at face value is up to you as he is losing credibility by the day.

 

Capital rule doesn't necessarily have to take place before a settlement.  I'm not saying that you're saying this, allnatural, but more of a general comment for everybody to think about.  Tim Howard and Rule of Law Guy discussed this yesterday afternoon starting with comment 13564.  Link here: https://howardonmortgagefinance.com/2019/10/21/some-simple-facts/#comment-13564

 

Howard: I don’t know why there couldn’t be a settlement between plaintiffs and the government on the net worth sweep and liquidation preference issues in the absence of a final capital rule. The two are related, but the first two are not dependent upon the last. In any case the companies will need to have built a significant capital base through retained earnings before they can do a public offering, and this will take time. Provided that FHFA does produce a final capital rule by the end of next year, we should still be on track for the sort of “staged release” from conservatorship that Treasury and FHFA have been describing over the past several months: final capital rule, settlement with plaintiffs canceling the net worth sweep and liquidation preference (with these now possibly being reversed in the sequence), negotiation with the companies of a consent decree governing...

 

ROLG:  Tim is absolutely correct that a litigation settlement that eliminates the senior preferred could be negotiated prior to the adoption of the final capital rule, and I believe that once this settlement is reached, there would be massive financial exposure to the govt in the event a successor FHFA director tried to reverse any such settlement. the practical reality of this administration’s actions to date, however, is that what has been thought to be able to be done relatively quickly actually gets done quite slowly. In terms of the effect of delay upon the settling parties, usually the party that has the “most to lose” from a settlement delay must consider “giving up” more to get the settlement done sooner rather than later…and that party in this case would be GSE shareholders.

[Luke 532]

I cannot wait to listen to the hearing! Wonder if all those that sold will be caught out by an earlier than expected ruling?

 

Notes from people that were supposedly at the hearing: https://groups.google.com/forum/#!topic/fannie-and-freddie-preferreds/WYmfnBht0cE

 

Better, of course, to wait for audio to see what transpired but the notes above can give us a general idea.

[Guest cherzeca]

@orthopa

 

I agree that par for juniors is high water mark on any exchange, but once financial advisors are retained, I expect they will inquire as to doing a rights offering to existing shareholders, something that Ackman and others have mentioned and that makes sense before going out to new investors...and rights offerings are usually done at a discount in order to entice shareholders to exercise their rights

 

What exactly would a rights offering entail? Would it require the recipients of the offering to put up more money?

 

recipients would be issued a right to buy common at say 10% discount to last 20 days trading of common.  freely tradable.  so you exercise in order not to be diluted.  easier to raise capital first with new stockholders. since freely tradable, big hitters can purchase rights that small fry dont want to exercise at say half the discount. everyone happy and some capital is raised. then go raise more capital from new shareholders

[Midas79]

recipients would be issued a right to buy common at say 10% discount to last 20 days trading of common.  freely tradable.  so you exercise in order not to be diluted.  easier to raise capital first with new stockholders. since freely tradable, big hitters can purchase rights that small fry dont want to exercise at say half the discount. everyone happy and some capital is raised. then go raise more capital from new shareholders

 

I'm just wondering if I should sell of my shares at some point to have the cash to participate in this offering without having to come up with outside money.

 

If there is no conversion then it sounds like this shouldn't affect holders of the juniors, and if there is I would hope that the imminence of a rights offering would be communicated to them first.

[Guest cherzeca]

recipients would be issued a right to buy common at say 10% discount to last 20 days trading of common.  freely tradable.  so you exercise in order not to be diluted.  easier to raise capital first with new stockholders. since freely tradable, big hitters can purchase rights that small fry dont want to exercise at say half the discount. everyone happy and some capital is raised. then go raise more capital from new shareholders

 

I'm just wondering if I should sell of my shares at some point to have the cash to participate in this offering without having to come up with outside money.

 

If there is no conversion then it sounds like this shouldn't affect holders of the juniors, and if there is I would hope that the imminence of a rights offering would be communicated to them first.

 

if you hold juniors had tight until when and if this rights offering is extended...no rush

[orthopa]

Calabria last month also said this: Re-proposal would delay final rule until "spring" and "closer to May;" also said that capital rule & PSPA would be done "hopefully middle of next year." "Capital rule... on its own timeline... changes to PSPA... on its own timeline... hopefully be done by the middle of next year"

 

So capital rule and PSPA to be completed by middle of next year and are independent of each other. Now whether you want to take his word at face value is up to you as he is losing credibility by the day.

 

Capital rule doesn't necessarily have to take place before a settlement.  I'm not saying that you're saying this, allnatural, but more of a general comment for everybody to think about.  Tim Howard and Rule of Law Guy discussed this yesterday afternoon starting with comment 13564.  Link here: https://howardonmortgagefinance.com/2019/10/21/some-simple-facts/#comment-13564

 

Howard: I don’t know why there couldn’t be a settlement between plaintiffs and the government on the net worth sweep and liquidation preference issues in the absence of a final capital rule. The two are related, but the first two are not dependent upon the last. In any case the companies will need to have built a significant capital base through retained earnings before they can do a public offering, and this will take time. Provided that FHFA does produce a final capital rule by the end of next year, we should still be on track for the sort of “staged release” from conservatorship that Treasury and FHFA have been describing over the past several months: final capital rule, settlement with plaintiffs canceling the net worth sweep and liquidation preference (with these now possibly being reversed in the sequence), negotiation with the companies of a consent decree governing...

 

ROLG:  Tim is absolutely correct that a litigation settlement that eliminates the senior preferred could be negotiated prior to the adoption of the final capital rule, and I believe that once this settlement is reached, there would be massive financial exposure to the govt in the event a successor FHFA director tried to reverse any such settlement. the practical reality of this administration’s actions to date, however, is that what has been thought to be able to be done relatively quickly actually gets done quite slowly. In terms of the effect of delay upon the settling parties, usually the party that has the “most to lose” from a settlement delay must consider “giving up” more to get the settlement done sooner rather than later…and that party in this case would be GSE shareholders.

 

I also agree that the two can run separate I just don't see the rush from the govt to settle unless forced to. Why would they? The real leverage for shareholders is the need to recap and if treasury wants to recap the Sr Preferred have to be gone and that wont be until next year as the capital build hasn't been long enough.

 

Secondly I have read others saying that a settlement could mean 100+% of par for preferred. How exactly? What are the mechanics that makes the Preferred worth more then $25 a share exactly? Any over-payment will not go directly to dividends and govt is not buying the Jr preferred from us so how exactly do we get 100%+ in a settlement? I think the relief that is possible is along the lines of what was requested in the en banc case.

 

Sullivan after the en banc opinion noted that he talked to people who where expecting way way more then par. How exactly does that happen? I think at this point that is unrealistic and any settlement will be regarding the Sr Preferred which is essentially the last PSPA agreement. Unless someone can fashion up a reasonable explanation and mechanism of how exactly the Jr preferred shares get money directly from treasury I think it just a pipe dream. There surely could be a court that awards something of substance but does that happen before mid next year after appeals etc? Unlikely

 

 

[allnatural]

@orthopa you are overthinking it i think. the simple mechanism to achieve > par is to issue a common conversion option to pfd shareholders where they receive $20-25 worth of new common shares (or via rights)... and if common becomes an attractive investment on the back-end, you can appreciate in value beyond the original conversion terms (or lose value if common goes down).