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

[investorG]

@onyx

 

"If he is referencing the common, no issue.  But if the prevailing market value of the Jr's is included in the exchange calculus, and the Jr's aren't trading at or near par, Jr holders won't view this as "fair"."

 

this junior pref for common exchange at par as opposed to trading price is something that the Ps will insist on in order to settle litigation.  now, it is fair to say that the rafter case before Sweeney is a common shareholder case (Ackman) and the Fairholme action before Lamberth includes both junior prefs and common classes, so there will be some division within the P ranks but I think the balance of power among Ps falls decidedly to the junior prefs

 

I took the "prevailing market prices" part of Phillips's exchange comment to refer to the common share price, i.e. the juniors will be offered a conversion at a common share price based on that in the market at the time of conversion. Citi offered their prefs a conversion at 85-95% of par at $3.25, where $3.25 was the average of the previous 22 trading days' common closing prices.

 

That's what I'm expecting with FnF, and is the basis for the tweet I made earlier today. Shorting the commons to buy prefs, driving the common price down for a bigger conversion ratio, and then covering the short with some of the converted shares is highly tempting if there is a strong reason to believe that FnF's conversion will work like Citi's.

 

https://twitter.com/midas79_/status/1201551381733281792

 

imo it's apples / oranges bc -- among other reasons -- the government wasn't aligned with commoners in Citi the same was as it is here with $50bn+ in potential equity value from warrants.  I do agree that the Jr pref has some litigation and perhaps precedent advantages in this potential negotiation.  the relationships to me are a wash due to possible public perception problems. I sincerely hope that all 3 buckets don't get greedy, there's likely a lot of potential market cap to share with each (and the new investors as the 4th) if it's done right.

[investorG]

@IG

 

I believe that the GSE bankers will want the junior prefs gone (as well as the senior prefs of course), and to do this there needs to be a package offered to junior pref holders to incent 2/3rds of each class to accept.  the most interesting aspect of the package will be the exchange into common feature, but it may also involve a distribution of  below market rights to common stock. the only thing not likely on offer is cash.

 

I was guessing more it would be voluntary exchange process rather than spending the effort to get 2/3 in so many classes.  They could likely clear out the bulk of the $33bn this way. 

 

If they ever offered you a package whereby they honorably retired the sr pref and suggested you convert at a ratio near or slightly above moelis, while at the same time Calabria said many years before dividends resume -- would you say I'll keep my dividend-less jr pref even if the big guys went through with the voluntary exchange that they theoretically negotitated?

[Midas79]

I think those hoping for something like an 8-10x exchange ratio for jr pref to common are likely to be disappointed.  If we even get to the point of a deal / exchange, the Jr pref has less leverage than most assume given the govt's warrants and commoners interests are likely aligned plus the threat of not turning on the non-cumulative dividends for many years (I don't think a common dividend is necessary to sell shares).  Moelis was more like 3x.  If they would fairly retire the sr pref I guess the jr pref holders would take something near or slightly above Moelis.

 

12.5x is my top-end scenario based on the Citi conversion, where the conversion was offered at 3x the previous day's ratio. FNMAS just hit 4x FNMA today. I won't be disappointed if it doesn't happen, but since FNMAS is 4x FNMA right now, I don't expect a conversion offer at anything lower than that. Otherwise it will be declined or undersubscribed, defeating the purpose.

 

4.5x (4.5 common shares per $25 of par value) is my baseline scenario at the moment, though I'm probably going to adjust this upward with Phillips' talk of a conversion at market value. 4.5x would require the commons to reach $5.56 before the conversion is offered, and I think that's a stretch.

 

The first Moelis plan got this right, with its 3.5x conversion ratio somewhat above that in the market. The updated plan has conversion ratios of 1.7 and 2.1 which just won't get it done. The cases have to be settled, and a weak conversion offer like that doesn't do any good. Also remember that the Moelis plan was paid for by pref shareholders; I find it very suspicious that their plan would disproportionately benefit the commons.

 

The idea that the existing prefs' dividends could remain off for a long time is utter garbage, though. There's no way the cases get settled while this is possible, and I disagree that selling common shares will be easy with no short-term prospects of a common dividend. Why make the capital raise harder rather than just turning the pref dividends back on or offering them a generous conversion and saving money at the same time?

[no_free_lunch]

What are peoples thoughts on the federal election and in particular how a win by the Democrats might impact the preferreds. Warren and Sanders are down so assuming a more centric candidate could the privatization still occur?  In my mind the selloff was driven by the timelines stretching past the election and this is my concern as well. However there is huge and high probability upside if Republicans win so it is just a question of what these things are worth under the Dems to balance the odds making.

 

Could court wins lead to some type of preferred redemption event even under a less friendly administration?

[Guest cherzeca]

@onyx

 

"If he is referencing the common, no issue.  But if the prevailing market value of the Jr's is included in the exchange calculus, and the Jr's aren't trading at or near par, Jr holders won't view this as "fair"."

 

this junior pref for common exchange at par as opposed to trading price is something that the Ps will insist on in order to settle litigation.  now, it is fair to say that the rafter case before Sweeney is a common shareholder case (Ackman) and the Fairholme action before Lamberth includes both junior prefs and common classes, so there will be some division within the P ranks but I think the balance of power among Ps falls decidedly to the junior prefs

 

I took the "prevailing market prices" part of Phillips's exchange comment to refer to the common share price, i.e. the juniors will be offered a conversion at a common share price based on that in the market at the time of conversion. Citi offered their prefs a conversion at 85-95% of par at $3.25, where $3.25 was the average of the previous 22 trading days' common closing prices.

 

That's what I'm expecting with FnF, and is the basis for the tweet I made earlier today. Shorting the commons to buy prefs, driving the common price down for a bigger conversion ratio, and then covering the short with some of the converted shares is highly tempting if there is a strong reason to believe that FnF's conversion will work like Citi's.

 

https://twitter.com/midas79_/status/1201551381733281792

 

imo it's apples / oranges bc -- among other reasons -- the government wasn't aligned with commoners in Citi the same was as it is here with $50bn+ in potential equity value from warrants.  I do agree that the Jr pref has some litigation and perhaps precedent advantages in this potential negotiation.  the relationships to me are a wash due to possible public perception problems. I sincerely hope that all 3 buckets don't get greedy, there's likely a lot of potential market cap to share with each (and the new investors as the 4th) if it's done right.

 

actually this is wrong.  there are many similarities.  see pps 14-16 of https://fas.org/sgp/crs/misc/R41427.pdf

[Guest cherzeca]

@midas

 

you have me thinking about whether big junior holders will arbitrage common/juniors going into the negotiation.  after all, these guys are arb mavens.  long junior/short commons improves exchange ratio and is hedged by the future receipt of common in the exchange.

[allnatural]

last few trading days the ratio between common and pfds are widening (from ~3x to over ~4x). could it be guys shorting common in anticipation?

[onyx1]

@investorG

 

"I don't think a common dividend is necessary to sell shares."

 

 

Can you explain how you have come to this conclusion in the context of raising $60bln or more in capital?

[Midas79]

@midas

 

you have me thinking about whether big junior holders will arbitrage common/juniors going into the negotiation.  after all, these guys are arb mavens.  long junior/short commons improves exchange ratio and is hedged by the future receipt of common in the exchange.

 

This is exactly what I was thinking. I didn't use the term arbitrage but I probably should have. If the big junior holders have as much influence as I think they do, this is exactly the kind of thing they would do. In fact, they would be stupid not to.

 

I still agree with something orthopa said a while back about the juniors not just wanting to win, but win versus the commons. Ackman bought some prefs in 2017 and a lot more in 2018; we will soon find out what he did in 2019. I found his pro-common comments very suspicious: he was either talking his book or trying to manipulate the market.

[investorG]

@onyx

 

"If he is referencing the common, no issue.  But if the prevailing market value of the Jr's is included in the exchange calculus, and the Jr's aren't trading at or near par, Jr holders won't view this as "fair"."

 

this junior pref for common exchange at par as opposed to trading price is something that the Ps will insist on in order to settle litigation.  now, it is fair to say that the rafter case before Sweeney is a common shareholder case (Ackman) and the Fairholme action before Lamberth includes both junior prefs and common classes, so there will be some division within the P ranks but I think the balance of power among Ps falls decidedly to the junior prefs

 

I took the "prevailing market prices" part of Phillips's exchange comment to refer to the common share price, i.e. the juniors will be offered a conversion at a common share price based on that in the market at the time of conversion. Citi offered their prefs a conversion at 85-95% of par at $3.25, where $3.25 was the average of the previous 22 trading days' common closing prices.

 

That's what I'm expecting with FnF, and is the basis for the tweet I made earlier today. Shorting the commons to buy prefs, driving the common price down for a bigger conversion ratio, and then covering the short with some of the converted shares is highly tempting if there is a strong reason to believe that FnF's conversion will work like Citi's.

 

https://twitter.com/midas79_/status/1201551381733281792

 

imo it's apples / oranges bc -- among other reasons -- the government wasn't aligned with commoners in Citi the same was as it is here with $50bn+ in potential equity value from warrants.  I do agree that the Jr pref has some litigation and perhaps precedent advantages in this potential negotiation.  the relationships to me are a wash due to possible public perception problems. I sincerely hope that all 3 buckets don't get greedy, there's likely a lot of potential market cap to share with each (and the new investors as the 4th) if it's done right.

 

actually this is wrong.  there are many similarities.  see pps 14-16 of https://fas.org/sgp/crs/misc/R41427.pdf

 

some similarities, more differences.  a) I believe the government converted their TARP preferred to common at the same time and same terms as other preferred securities (much of which they were actually not senior to) --- going into the negotiation they were actually on the same team as the other preferred, which is not the case here on the warrants.  and b) there was hysteria back then to increase the common equity component of capital vs preferred and so they needed a big bang to incentivize the prefs to convert; I agree in this instance there would need to be incentivization, I'm just suggesting I wouldn't advise par / $3 (8x+) as a likely ratio in this potential scenario.

[investorG]

@investorG

 

"I don't think a common dividend is necessary to sell shares."

 

 

Can you explain how you have come to this conclusion in the context of raising $60bln or more in capital?

 

Well it seems like putting the cart before the horse at the moment with the delays but if they get going I'd expect most of the ~ $125bn or so in capital needed to come from retained earnings and private investments compared with the re-IPO.  Also, many potential investors understand the situation to build rather than dispense capital for a few year period, plenty of companies come out the gate not paying dividends for some time if there are good reasons not to.

[Guest cherzeca]

@investorG

 

the biggest dissimilarity between C and GSEs is the presence of substantial GSE junior pref that is expensive and the holders of which hold a litigation get out of jail card against the govt, which works in favor of the junior pref.  if you have been through a few restructurings, you would know that financial advisors will want to eliminate existing expensive prefs, get everyone in the pool, and then be able to build the capital book with common and maybe some new cheaper prefs.  as for being able to pay dividends on common, the big point is that the book will be much larger with more buyers that will consider buying common; if the street believes that common won't get a dividend then you have lost a huge swath of potential buyers.

 

the most interesting takeaway from C that I forgot is that the govt expunged some of its warrants to make the capital raising successful.  could be a precedent for GSEs, which is a similarity that is interesting.

[DRValue]

If Collins is found as direct claims does that end Washington federal as they argue that claims are derivative?

[Luke 532]

FSOC

https://home.treasury.gov/system/files/261/FSOC2019AnnualReport.pdf

 

In September 2019, Treasury and the FHFA agreed to modifications to the Preferred Stock Purchase Agreements (PSPAs) that will permit Fannie Mae and Freddie Mac to retain additional earnings in excess of the $3 billion capital reserves previously permitted by their PSPAs. Under these modifications, Fannie Mae and Freddie Mac will be permitted to maintain capital reserves of $25 billion and $20 billion, respectively. Treasury and Fannie Mae and Freddie Mac also agreed to negotiate an additional amendment to the PSPAs adopting covenants that are intended to further enhance taxpayer protections.

[Guest cherzeca]

If Collins is found as direct claims does that end Washington federal as they argue that claims are derivative?

 

apples and oranges.  in collins Ps are seeking to invalidate NWS as being beyond authority of conservator under HERA.  now whose claim is this, shareholders (direct) or corp (derivative)?  wash fed is a takings/illegal exaction claim under 5th A US const...which is clear that it is a claim of the shareholders' whose property was taken without compensation.  so no read over.

[Luke 532]

SCOOP: @FHFA soon to select adviser on massive @FannieMae @FreddieMac

stock offering list narrorwed to several investment banks, including Perella Weinberg Partners, possibly PJT Partrners; Govt signaled decision after Thanksgiving to oversee massive IPO more now @FoxBusiness

[Guest cherzeca]

SCOOP: @FHFA soon to select adviser on massive @FannieMae @FreddieMac

stock offering list narrorwed to several investment banks, including Perella Weinberg Partners, possibly PJT Partrners; Govt signaled decision after Thanksgiving to oversee massive IPO more now @FoxBusiness

 

either firm would be an excellent choice.  fhfa needs advisory work, not capital raising work which is where the bigger money will be, and those firms (JPM, Goldman etc) will do the underwritings.  PJT is a spin off from Blackstone, one of whose funds is partly behind the moelis blueprint.

 

I went to the moelis blueprint to confirm that Paulson and a Blackstone fund paid for the moelis blueprint, but their identities which I remember from the 2017 version seem to be absent from the 2018 update.  but I did reread the summary and recommendations again:

 

"The first step must be to begin rebuilding capital by suspending dividends paid to Treasury. The second step is to recognize the government’s profits by acknowledging that Treasury’s senior preferred stock has been repaid with interest. While the senior preferred remains outstanding, it will be impossible for the GSEs to raise equity from the private markets. The third step is for FHFA to direct Fannie and Freddie to submit capital restoration plans, as authorized by HERA. Taking these three steps immediately starts on the path towards restoring safety and soundness to protect American taxpayers."

 

seems like the moelis blueprint is off to a good start

[rros]

SCOOP: @FHFA soon to select adviser on massive @FannieMae @FreddieMac

stock offering list narrorwed to several investment banks, including Perella Weinberg Partners, possibly PJT Partrners; Govt signaled decision after Thanksgiving to oversee massive IPO more now @FoxBusiness

They now have the incentive to beat Aramco's IPO lol.

[Luke 532]

ACG estimated timeline, as of 12-6-2019 (attached)...

[allnatural]

Looks like ACG's view is that the admin will do the "irreversible administrative steps" ahead of the election (settlement + pspa amendment) while leaving the heavy lifting / politically hairy steps (IPO) to post election. As Jr PFD holder our day will be those 2 key events in 2020. On a settlement with defined conversion terms / PSPA amendment to write down the snr pfds I would think jr pfds at the very least break 2019 highs of ~$14/shr, more likely $16-$20 range.

[Midas79]

With ACG, it's hard to tell how much they know from inside sources versus how much they're just making educated guesses at.

 

It's clear that they're putting a lot of resources into the saga, though.

[Guest cherzeca]

With ACG, it's hard to tell how much they know from inside sources versus how much they're just making educated guesses at.

 

It's clear that they're putting a lot of resources into the saga, though.

 

my problem with ACG is that like any other consultant that advises clients for a fee, it must not give away to the public what it charges its clients.  but it can't seem to keep form hitting the twitter button, halfway as it were, with tidbits that it doesn't want to elaborate upon...which leaves non-clients not knowing the whys and wherefores, or whether what they think makes sense

[Luke 532]

The latest from Gary Hindes (attached)...

[Luke 532]

Sweeney decision... commentary below from Peter Chapman.

Under seal, Judge Sweeney issued an opinion and order (Doc. 447) this evening "granting in part and denying in part" the government's motion to dismiss.  "The court grants defendant's motion to dismiss with respect to the direct claims and denies defendant's motion to dismiss with respect to the derivative claims.  The parties shall propose redactions by 12/16/2019 and file a joint status report in which they propose further proceedings by 1/10/2020," according to notations on the docket sheet.

 

It appears Judge Sweeney was prophetic when she said "we'll have many days in court," at line 12 of page 255 of the hearing transcript from Nov. 19, 2019. 

[Midas79]

Does anyone have a list of all the cases in front of Sweeney handy? I'm trying to figure out which cases and claims just got dismissed.

 

If all direct claims are dismissed, and the dismissal is not reversed by a higher court, does that close the door on any monetary damages being paid directly to shareholders?

 

I do find it strange that so many plaintiffs in other cases went to great lengths to show that their claims were direct, while Sweeney went the other way and is only allowing derivative claims to go forward.