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

[orthopa]

@orthopa

 

HL should have gotten fully up to speed by now.  I suspect they have been advising FHFA about ability to finance proposed cap rule draft, which I believe is their biggest value add at the moment.  while they can advise FHFA of the merits of the GSEs capital plans, they really are reactive rather than pro-active re this review.

 

as to seila, I expect at a minimum that calabria can learn he can be fired at will, so tempus fugit.  if as I also expect the CID is vacated, then I simply dont see how treasury/fhfa can maintain its litigation posture (no holds barred) anymore.  unrealistic.

 

Great thanks, should be an interesting rest of the year.

[SnarkyPuppy]

Has anyone found a good hedge on high rates of forbearance / defaults?  Thinking about further increasing my exposure here but doing so any higher without a hedge would be an irresponsible position size.  Curious if anyone has found a good proxy to hedge this w/ OTM puts (despite high implied vol)?

[Luke 532]

Has anyone found a good hedge on high rates of forbearance / defaults?  Thinking about further increasing my exposure here but doing so any higher without a hedge would be an irresponsible position size.  Curious if anyone has found a good proxy to hedge this w/ OTM puts (despite high implied vol)?

 

You read my mind.  I, too, would be interested if anybody has thoughts on a good hedge.

[lnofeisone]

Has anyone found a good hedge on high rates of forbearance / defaults?  Thinking about further increasing my exposure here but doing so any higher without a hedge would be an irresponsible position size.  Curious if anyone has found a good proxy to hedge this w/ OTM puts (despite high implied vol)?

 

You read my mind.  I, too, would be interested if anybody has thoughts on a good hedge.

 

ASPS?

[Guest cherzeca]

I suppose you could short publicly traded servicers, but a little late for that I am guessing.  an overlooked hedge is more cash.

[Luke 532]

Cap rule is out: 2.5% minimum, ~$200B total

 

FHFA Releases Re-Proposed Capital Rule for the Enterprises http://ow.ly/cM1A50zLyie

[DRValue]

Cap rule is out: 2.5% minimum, ~$200B total

 

I want to say calabria is preparing for this to be walked down but I just don't know anymore. 10pct roe is very utility like.

[DRValue]

Based on the capital buffers that are needed before distributions, preferred ain't gonna trade at par unless they're converted. Better hope for conversion.

[investorG]

The important pages to read are 231 and 232.

 

Common equity requirements are $110bn for FNMA and $65bn for FMCC for $175bn total.

 

The other higher numbers can be filled with easier to raise preferred stock, sub debt, general loan loss reserves to get to the max headline #'s of ~$240bn.

 

The $175bn figure above is far higher than reasonable but it does include some different transition levels if they wanted to get released with consent before the full $175bn is reached.  Potentially as low as the ~$125bn range.

 

edit: hopefully this is why calabria mentioned Tsy forgiving some warrants...

[TwoCitiesCapital]

Cap rule is out: 2.5% minimum, ~$200B total

 

FHFA Releases Re-Proposed Capital Rule for the Enterprises http://ow.ly/cM1A50zLyie

 

...so Fannie/Freddie need $200+ billion in capital to support an insurance book of $6 trillion and are only penalized in the event of an actual default event

 

but the Federal Reserve only needs $39 billion in capital go buy a $6 trillion book of securities with exposure to the same default risk but also market risk...

 

I'm sure it makes sense to someone, but not me.

[DRValue]

edit: hopefully this is why calabria mentioned Tsy forgiving some warrants...

 

When?

[Midas79]

edit: hopefully this is why calabria mentioned Tsy forgiving some warrants...

 

When?

 

This never happened. Calabria mentioned Treasury potentially forgiving some of its investment, but he was clearly talking about the seniors. Treasury forgiving some or all of the warrants doesn't help recap FnF at all.

[investorG]

edit: hopefully this is why calabria mentioned Tsy forgiving some warrants...

 

When?

 

This never happened. Calabria mentioned Treasury potentially forgiving some of its investment, but he was clearly talking about the seniors. Treasury forgiving some or all of the warrants doesn't help recap FnF at all.

 

The companies are worth "X"bn.  Taking away one of the consumers of that value leaves extra portions for the existing common + Potential jr converters + new equity.  Plus no one wants a govt overhang of more secondary sales after the primary ones.

[Midas79]

edit: hopefully this is why calabria mentioned Tsy forgiving some warrants...

 

When?

 

This never happened. Calabria mentioned Treasury potentially forgiving some of its investment, but he was clearly talking about the seniors. Treasury forgiving some or all of the warrants doesn't help recap FnF at all.

 

The companies are worth "X"bn.  Taking away one of the consumers of that value leaves extra portions for the existing common + Potential jr converters + new equity.  Plus no one wants a govt overhang of more secondary sales after the primary ones.

 

That's not how capital works at all. Core capital is common equity plus non-cumulative pref equity plus additional paid-in capital plus retained earnings. You're talking about market cap.

 

Treasury will exercise the warrants before the re-IPO. That removes any concerns about holdings and timing.

[beaufort]

Very rough math.

 

CET1 Fannie 110

CET1 Freddie 65

JPS combined 33 - assume exchange face value.

Prepaid expense 20 over contribution from NWS combined tax or commitment fee for line.  Not sure how this unfolds, but assume accounted for, even if current common and prefs don't exclusively benefit.

 

Fannie current common approx 15

Freddie current common approx 10

 

Comprised of

 

Warrant dilution of current common at 80% = 20 for UST

Current common = 5B of re capped GSEs.

 

Total 253 of newly re capped GSEs. 

 

This is close to the headline number of 245.

Assume settlement of litigation etc.

Assume exercise of warrant before raising capital CET1 and JPS exchange.

 

 

My guesstimate is target ROE of 11-12%.

[Guest cherzeca]

GSEs are going to need that dividend overage payment of ~$30B in settlement of litigation.

[beaufort]

GSEs are going to need that dividend overage payment of ~$30B in settlement of litigation.

 

I have it down as 20.  I wasn't kidding re rough math.  My instinct is current JPS holders get more of the newly constituted GSEs and the dividend overage will play a part.

[investorG]

edit: hopefully this is why calabria mentioned Tsy forgiving some warrants...

 

When?

 

feb interview on bloomberg

[investorG]

Very rough math.

 

CET1 Fannie 110

CET1 Freddie 65

JPS combined 33 - assume exchange face value.

Prepaid expense 20 over contribution from NWS combined tax or commitment fee for line.  Not sure how this unfolds, but assume accounted for, even if current common and prefs don't exclusively benefit.

 

Fannie current common approx 15

Freddie current common approx 10

 

Comprised of

 

Warrant dilution of current common at 80% = 20 for UST

Current common = 5B of re capped GSEs.

 

Total 253 of newly re capped GSEs. 

 

This is close to the headline number of 245.

Assume settlement of litigation etc.

Assume exercise of warrant before raising capital CET1 and JPS exchange.

 

 

My guesstimate is target ROE of 11-12%.

 

highly likely jr pref isn't getting par. 

[beaufort]

highly likely jr pref isn't getting par.

 

So you say.

[investorG]

edit: hopefully this is why calabria mentioned Tsy forgiving some warrants...

 

When?

 

This never happened. Calabria mentioned Treasury potentially forgiving some of its investment, but he was clearly talking about the seniors. Treasury forgiving some or all of the warrants doesn't help recap FnF at all.

 

The companies are worth "X"bn.  Taking away one of the consumers of that value leaves extra portions for the existing common + Potential jr converters + new equity.  Plus no one wants a govt overhang of more secondary sales after the primary ones.

 

That's not how capital works at all. Core capital is common equity plus non-cumulative pref equity plus additional paid-in capital plus retained earnings. You're talking about market cap.

 

Treasury will exercise the warrants before the re-IPO. That removes any concerns about holdings and timing.

 

in reality they are likely inter-related.  with highly visible figures like ackman odds favor an orchestrated plan that delivers X value to different groups.  the capital rule and Tsy plan releases suggest precision.    they could also sell a portion of the warrants up front rather than exercise and hold.

[Guest cherzeca]

Very rough math.

 

CET1 Fannie 110

CET1 Freddie 65

JPS combined 33 - assume exchange face value.

Prepaid expense 20 over contribution from NWS combined tax or commitment fee for line.  Not sure how this unfolds, but assume accounted for, even if current common and prefs don't exclusively benefit.

 

Fannie current common approx 15

Freddie current common approx 10

 

Comprised of

 

Warrant dilution of current common at 80% = 20 for UST

Current common = 5B of re capped GSEs.

 

Total 253 of newly re capped GSEs. 

 

This is close to the headline number of 245.

Assume settlement of litigation etc.

Assume exercise of warrant before raising capital CET1 and JPS exchange.

 

 

My guesstimate is target ROE of 11-12%.

 

p.9 of fact sheet:

 

"As of September 30, 2019, the combined Enterprise CET1 capital requirement would have been $76 billion (4.5 percent of RWA) and the tier 1 risk-based capital requirement would have been $101 billion (6 percent of RWA)."

 

so forgetting about capital buffers for a moment (which restrict dividends and exec bonus payments), why is this stringent?  looks reasonable.  what am I missing?

 

[investorG]

highly likely jr pref isn't getting par.

 

So you say.

 

I wish we get par but i've believed for years we likely won't.  not enough leverage and possibly bad optics.  there's no requirement dividends come back on for a long time.  the companies need $175bn common equity for even the option for dividends to turn on.  I was told prior that a dividend was required for an initial capital raise but that doesn't appear likely unless they do $150bn+ at once.

[investorG]

Very rough math.

 

CET1 Fannie 110

CET1 Freddie 65

JPS combined 33 - assume exchange face value.

Prepaid expense 20 over contribution from NWS combined tax or commitment fee for line.  Not sure how this unfolds, but assume accounted for, even if current common and prefs don't exclusively benefit.

 

Fannie current common approx 15

Freddie current common approx 10

 

Comprised of

 

Warrant dilution of current common at 80% = 20 for UST

Current common = 5B of re capped GSEs.

 

Total 253 of newly re capped GSEs. 

 

This is close to the headline number of 245.

Assume settlement of litigation etc.

Assume exercise of warrant before raising capital CET1 and JPS exchange.

 

 

My guesstimate is target ROE of 11-12%.

 

p.9 of fact sheet:

 

"As of September 30, 2019, the combined Enterprise CET1 capital requirement would have been $76 billion (4.5 percent of RWA) and the tier 1 risk-based capital requirement would have been $101 billion (6 percent of RWA)."

 

so forgetting about capital buffers for a moment (which restrict dividends and exec bonus payments), why is this stringent?  looks reasonable.  what am I missing?

 

yes $76bn is the most bullish case which would be solid news.  however i think there's also likely a restraint on the leverage ratio side.  they need $152bn (89 + 63) of tier 1 capital for their leverage ratio (excluding buffer), see page 231 and 232.  subtract out a reasonable component for preferred and maybe that minimum non-buffer common requirement is 100-125bn vs the 76bn you cite. 

[beaufort]

@cherzeca

I did a search in the pdf of the fact sheet for 'consent' with no result.  The numbers you cited may be what gets us to consent decree.

 

Management will want to get paid well, and quickly, which gets us to the buffer numbers.

 

(I am looking forward to some sort of future congressional testimony with GSE management saying something along the lines of 'buffers, yeah, yeah, buffers. The enterprises had a lot of buffers.) 

 

@InvestorG

Current JPS holders haven't gone through years of waiting, and investing in litigation, to not get a significant amount of the recapped GSEs and start earning dividends.