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

[Guest cherzeca]

I dont understand Phillip's reasoning...says these rules usually take years...well, this proposed rule is a redo of a prior proposed rule from 2018, so this has already taken years.  I dont buy it

[muscleman]

no reason to own GSEs right now if you are timing things.  the whole legal denouement awaits scotus next winter.  nothing administrative will be done until after Labor Day, when comment period has closed. 

 

will see some selling and price drift

 

Hmm... Do Supreme courts usually rule this slowly? I thought they pick up a case in a term and would just rule the next term.... Why can't they do things faster.....

I don't see why admin would do anything after Labor day and before election. If they have dragged it on for 3.5 years, why risk doing it now right before election?

 

[Guest cherzeca]

no reason to own GSEs right now if you are timing things.  the whole legal denouement awaits scotus next winter.  nothing administrative will be done until after Labor Day, when comment period has closed. 

 

will see some selling and price drift

 

Hmm... Do Supreme courts usually rule this slowly? I thought they pick up a case in a term and would just rule the next term.... Why can't they do things faster.....

I don't see why admin would do anything after Labor day and before election. If they have dragged it on for 3.5 years, why risk doing it now right before election?

 

procrastinating and then rushing before a time limitation seems like how most things are done

[Midas79]

I dont understand Phillip's reasoning...says these rules usually take years...well, this proposed rule is a redo of a prior proposed rule from 2018, so this has already taken years.  I dont buy it

 

I agree. May 22, when the rule was released, to August 31, when the comment period is set to end, is over 90 days already. What good would an extra 30 to 60 days do? The rule isn't that complicated.

 

In order to get things done during lame duck the rule needs to be finalized in November. How much time will need to pass between the end of the comment period and finalization of the rule?

[Guest cherzeca]

I dont understand Phillip's reasoning...says these rules usually take years...well, this proposed rule is a redo of a prior proposed rule from 2018, so this has already taken years.  I dont buy it

 

I agree. May 22, when the rule was released, to August 31, when the comment period is set to end, is over 90 days already. What good would an extra 30 to 60 days do? The rule isn't that complicated.

 

In order to get things done during lame duck the rule needs to be finalized in November. How much time will need to pass between the end of the comment period and finalization of the rule?

 

that is up to calabria.  if he wants to make changes, the sooner he starts working on them the better.  If he doesnt want to make changes, could be next day

[Guest cherzeca]

back of envelope time.  I dont do this often, but it makes sense to do this now.

 

for fnma, looks to me like fnma has a reasonably reliable net income run rate of $10B/yr.  can be higher if g fees go higher and market share does not shrink (much).  being generous, let's assign a 10X PE and come up with a $100B equity valuation.  I will lower this PE below, since it will need to be lowered in connection with offerings.

 

there are 1.158B shares of common stock outstanding. giving effect to treasury warrants, this equals 5.8B shares of common stock on a fully diluted basis.

 

there is $19.13B of junior pref outstanding (par amount).  lets assume no exchange but par value for junior pref

 

so, assuming no exchange offer, $100B minus $19.13B = $80.87B divided by 5.8B shares = $13.9/share

 

now assume that the bankers require a 6X PE to blow out $100B of common (I understand the capital rule may require more, but let's assume this is the dilution target for this calculation).  reduces equity valuation to $60B, minus junior pref of $19.13B = $40.9B.

 

$7/share common valuation, pre-offering.  now, in this interest rate environment, $100B of cash proceeds does not increase substantially net income, as you would only replace debt expense at .20% or $200MM.  so ignore incremental income from use of proceeds.

 

now, how many more common shares (assume no pref shares issued, which is unlikely but helps simplify) do the bankers need to sell in order to raise $100B?  short answer? I don't know.  But back of envelope-wise, let's assume another number of shares equal to 5.8B shares multiplied by a factor of 2.44 (which is $100B raise divided by existing $40.9B common valuation)...which = 14.18B number of shares to be raised, + 5.8B commons shares outstanding pre-offerings = 20B common shares outstanding post offerings.  $40.9B divided by 20B common shares = $2.04/common share...and common is trading right there now.

 

edited to correct # of shares outstanding after offerings.

 

edit:  now, if the above is anywhere close, one might expect a re-rating back up to 10x PE once the capital raise is finished...in some four years...which would yield a $4/common share price.  what is the biggest variable to above?  introducing new preferred stock into the offerings.  given current rate environment, it will be a substantially more cost effective capital structure to issue as much new preferred stock as possible...reduce common shares outstanding substantially.  the bankers' impetus to do this may incentivize issuers to offer attractive exchange terms to existing junior pref.

 

 

 

[DRValue]

back of envelope time.  I dont do this often, but it makes sense to do this now.

 

for fnma, looks to me like fnma has a reasonably reliable net income run rate of $10B/yr.  can be higher if g fees go higher and market share does not shrink (much).  being generous, let's assign a 10X PE and come up with a $100B equity valuation.  I will lower this PE below, since it will need to be lowered in connection with offerings.

 

there are 1.158B shares of common stock outstanding. giving effect to treasury warrants, this equals 5.8B shares of common stock on a fully diluted basis.

 

there is $19.13B of junior pref outstanding (par amount).  lets assume no exchange but par value for junior pref

 

so, assuming no exchange offer, $100B minus $19.13B = $80.87B divided by 5.8B shares = $13.9/share

 

now assume that the bankers require a 6X PE to blow out $100B of common (I understand the capital rule may require more, but let's assume this is the dilution target for this calculation).  reduces equity valuation to $60B, minus junior pref of $19.13B = $40.9B.

 

$7/share common valuation, pre-offering.  now, in this interest rate environment, $100B of cash proceeds does not increase substantially net income, as you would only replace debt expense at .20% or $200MM.  so ignore incremental income from use of proceeds.

 

now, how many more common shares (assume no pref shares issued, which is unlikely but helps simplify) do the bankers need to sell in order to raise $100B?  short answer? I don't know.  But back of envelope-wise, let's assume another number of shares equal to 5.8B shares multiplied by a factor of 2.44 (which is $100B raise divided by existing $40.9B common valuation)...which = 14.18B number of shares to be raised, + 5.8B commons shares outstanding pre-offerings = 20B common shares outstanding post offerings.  $40.9B divided by 20B common shares = $2.04/common share...and common is trading right there now.

 

edited to correct # of shares outstanding after offerings.

 

edit:  now, if the above is anywhere close, one might expect a re-rating back up to 10x PE once the capital raise is finished...in some four years...which would yield a $4/common share price.  what is the biggest variable to above?  introducing new preferred stock into the offerings.  given current rate environment, it will be a substantially more cost effective capital structure to issue as much new preferred stock as possible...reduce common shares outstanding substantially.  the bankers' impetus to do this may incentivize issuers to offer attractive exchange terms to existing junior pref.

 

 

 

My assumption is that they raise as much low cost preferred as they can which I would expect to be at least the same amount as they currently have. They obviously have the ability to 'carry' that amount.

[orthopa]

back of envelope time.  I dont do this often, but it makes sense to do this now.

 

for fnma, looks to me like fnma has a reasonably reliable net income run rate of $10B/yr.  can be higher if g fees go higher and market share does not shrink (much).  being generous, let's assign a 10X PE and come up with a $100B equity valuation.  I will lower this PE below, since it will need to be lowered in connection with offerings.

 

there are 1.158B shares of common stock outstanding. giving effect to treasury warrants, this equals 5.8B shares of common stock on a fully diluted basis.

 

there is $19.13B of junior pref outstanding (par amount).  lets assume no exchange but par value for junior pref

 

so, assuming no exchange offer, $100B minus $19.13B = $80.87B divided by 5.8B shares = $13.9/share

 

now assume that the bankers require a 6X PE to blow out $100B of common (I understand the capital rule may require more, but let's assume this is the dilution target for this calculation).  reduces equity valuation to $60B, minus junior pref of $19.13B = $40.9B.

 

$7/share common valuation, pre-offering.  now, in this interest rate environment, $100B of cash proceeds does not increase substantially net income, as you would only replace debt expense at .20% or $200MM.  so ignore incremental income from use of proceeds.

 

now, how many more common shares (assume no pref shares issued, which is unlikely but helps simplify) do the bankers need to sell in order to raise $100B?  short answer? I don't know.  But back of envelope-wise, let's assume another number of shares equal to 5.8B shares multiplied by a factor of 2.44 (which is $100B raise divided by existing $40.9B common valuation)...which = 14.18B number of shares to be raised, + 5.8B commons shares outstanding pre-offerings = 20B common shares outstanding post offerings.  $40.9B divided by 20B common shares = $2.04/common share...and common is trading right there now.

 

edited to correct # of shares outstanding after offerings.

 

edit:  now, if the above is anywhere close, one might expect a re-rating back up to 10x PE once the capital raise is finished...in some four years...which would yield a $4/common share price.  what is the biggest variable to above?  introducing new preferred stock into the offerings.  given current rate environment, it will be a substantially more cost effective capital structure to issue as much new preferred stock as possible...reduce common shares outstanding substantially.  the bankers' impetus to do this may incentivize issuers to offer attractive exchange terms to existing junior pref.

 

 

 

My assumption is that they raise as much low cost preferred as they can which I would expect to be at least the same amount as they currently have. They obviously have the ability to 'carry' that amount.

 

If/when they do issue new preferred it will probably be mandatory convertible after a period of a couple years. This way you give the div that investors in this environment crave but also satisfy capital requirements as Calabria may deem convertible preferred as CET1. Either way the lb of flesh still gets pulled from the common shares.

[Guest cherzeca]

issuing pref will definitely make sense and tend to increase common share price...but too many moving parts and variables to ballpark

[Midas79]

@cherzeca

 

I thought a market cap calculation excluded preferred shares. Doing so with your numbers changes $40.9B to $60B and the final share price to $3.88 at a 6 P/E and $6.47 at a 10 P/E.

 

However, I think there's a simpler version given your market cap and cap raise numbers. If the market thinks FnF's total common stake is worth $100B, and they are being asked to contribute $100B to buy common shares, they will demand 100% of the total commons. Maybe they will leave a token amount for existing shareholders, pennies per share max. This also leaves basically nothing for the warrants, and the juniors would refuse an exchange because they wouldn't get anywhere close to $19B in value.

 

The same happens if they only think the total common stake is worth $60B and they're asked to buy $60B worth of commons. In fact, due to the certainty equivalent ($60B in cash is worth more than 100% of companies perceived to be worth $60B), it might not be possible to do a capital raise as large as the common market cap estimate.

 

Either the raise needs to be smaller or the market has to place a higher value on the total common stake. My working estimate for FnF's combined market cap is $180-216B ($18B in annual earnings, P/E of 10-12). Fannie's assets and income are around 60% of FnF's combined, so that leads to a $108-127B market cap for Fannie.

 

Using $120B, there is enough room to raise $60B in commons (who will want a 2/3 stake or so; 1/2 is too little due to the certainty equivalent) and still have $40B of valuation to split among the warrants, converted juniors, and existing commons. Treasury's warrants (for FnF combined) are probably not worth close to the $60-80B that Craig Phillips said they internally value them at, though. Maybe half that.

[Guest cherzeca]

"However, I think there's a simpler version given your market cap and cap raise numbers. If the market thinks FnF's total common stake is worth $100B, and they are being asked to contribute $100B to buy common shares, they will demand 100% of the total commons."

 

disagree.  if pre-offering the common equity is worth $100B, with each share worth $X per share, then to raise $100B the new investors dont need ALL of the common equity, just enough so that common per share is reduced to $X/Y....the pie remains stagnant (forgetting about the investment expense savings), but the slicing up of the pie changes, with existing shareholders losing proportionate share of equity and suffering in share price...and by my calculation, the market has already anticipated this happening (and of course the senior prefs being nuked)

[Guest cherzeca]

"However, I think there's a simpler version given your market cap and cap raise numbers. If the market thinks FnF's total common stake is worth $100B, and they are being asked to contribute $100B to buy common shares, they will demand 100% of the total commons."

 

disagree.  if pre-offering the common equity is worth $100B, with each share worth $X per share, then to raise $100B the new investors dont need ALL of the common equity, just enough so that common per share is reduced to $X/Y....the pie remains stagnant (forgetting about the investment expense savings), but the slicing up of the pie changes, with existing shareholders losing proportionate share of equity and suffering in share price...and by my calculation, the market has already anticipated this happening (and of course the senior prefs being nuked)

 

the key here is to understand that the PE multiple will be re-rated down significantly to get the offering done.  if you nuke the senior prefs, is the common worth $2/share? no. but the market will expect offerings that will drive the price down to $2/share....in fact if there is a deal announced that kills senior prefs and common jumps to $7/ share then you will have a shorting opportunity imo

[Luke 532]

ACG's latest (attached)

7-30-2020_GSE_Reform_Timeline.pdf

[Guest cherzeca]

most recent comment letter to fhfa re proposed capital rule attached

July_31_fhfa_comment_letter.docx

[orthopa]

ACG's latest (attached)

 

I find it interesting that they have the settlement window going out till mid June of next year. Once the capital rule is finalized Calabria should request capital restoration plans from FnF. MS and JPM  cannot give CRP without knowing what the final PSPA amendment is and the fate of the Jr Preferred, ie settlement. . ACGs timeline assumes a change in president so I not sure why there would be a delay into june of next year for the consent decree and settlement. The optimist in me thinks once the capital rule is finalized things should start to fall into line from requesting capital restoration plans to consent decree to raise capital in a fairly orderly fashion. If your Calabria and your goal is to build capital why drag your feet after the capital is finalized and we are past the election where or not Trump whens? Lets raise some capital!

[Luke 532]

 

I find it interesting that they have the settlement window going out till mid June of next year.

 

I found that particular piece interesting as well and a bit confusing.

[Guest cherzeca]

"Once the capital rule is finalized Calabria should request capital restoration plans from FnF. MS and JPM  cannot give CRP without knowing what the final PSPA amendment is and the fate of the Jr Preferred, ie settlement."

 

agree.  either things are going to go very quickly after Labor Day or Calabria is an incompetent fool.  I'm not giving odds...

[investorG]

August is here.  This is the month that a 4th amendment should happen.

 

Biden - Warren will probably fire Calabria in January for cause.  The Seila oral arguments reinforced that the parameters to justify his firing are vague.  While Calabria may not be literally forced from the building until the courts rule, his powers would be greatly reduced during limbo.

 

Mnuchin and Calabria should act bravely this month.  A 4th amendment does not need the capital rule finalized, that is a separate track.  A consent decree can happen in the lame duck if necessary.

 

Good luck, everyone.

[Guest cherzeca]

August is here.  This is the month that a 4th amendment should happen.

 

Biden - Warren will probably fire Calabria in January for cause.  The Seila oral arguments reinforced that the parameters to justify his firing are vague.  While Calabria may not be literally forced from the building until the courts rule, his powers would be greatly reduced during limbo.

 

Mnuchin and Calabria should act bravely this month.  A 4th amendment does not need the capital rule finalized, that is a separate track.  A consent decree can happen in the lame duck if necessary.

 

Good luck, everyone.

 

I dont see anything happening until after Labor Day when final rule is to be promulgated.  nothing happens in DC in august anyhow. I think it is more likely to see things getting done in October than august.

[allnatural]

I think ACG is putting the settlement window out to June simply bc it lines up with the latest SCOTUS has to rule on the Collins case. But you would think if they have conviction of a 4th amendment in Q4, that 4th amendment would decide the final treatment of the snr pfds. Theoretically if a 4th amendment includes writing down the snr pfds and a tax credit for the excess payments, the government doesnt need to engage with or "settle" anything with shareholders. They are simply giving them the remedy shareholder desired and would have the result of making the Collins case irrelevant.

[Guest cherzeca]

I think ACG is putting the settlement window out to June simply bc it lines up with the latest SCOTUS has to rule on the Collins case. But you would think if they have conviction of a 4th amendment in Q4, that 4th amendment would decide the final treatment of the snr pfds. Theoretically if a 4th amendment includes writing down the snr pfds and a tax credit for the excess payments, the government doesnt need to engage with or "settle" anything with shareholders. They are simply giving them the remedy shareholder desired and would have the result of making the Collins case irrelevant.

 

agree.  I get the sense that calabria (and mnuchin) want to take care of things on their own, let the litigation become moot by their action and let the junior prefs deal with the GSEs and their financial advisors down the road.  I have the sense that you will see a 4th A having such terms and at the time of their choosing, and if it gives Ps all they would get by way of remedy, then no need to engage other than to simply go into court and say the cases have been mooted by 4th A...recall Calabria saying that the litigation will "take care of itself".  but recall one part of the litigation landscape involves the question of his own possible longevity, so if he doesnt give Ps what they want and biden is elected, he can ride off into the sunset on his mule

[Midas79]

How often do cases in front of SCOTUS get settled after oral arguments but before an opinion is issued? Do the Justices frown on this given their vast caseload and limited resources, or is it similar to lower courts where they are glad it happened so they can devote said resources elsewhere?

[Guest cherzeca]

How often do cases in front of SCOTUS get settled after oral arguments but before an opinion is issued? Do the Justices frown on this given their vast caseload and limited resources, or is it similar to lower courts where they are glad it happened so they can devote said resources elsewhere?

 

after oral arg, very rarely. after cert grant but before oral argument, rarely.  there was recent case involving NY gun laws, where NY passed a revision to litigated law that mooted the case after cert grant but before oral arg.  some judges get pissed (Alito), most just roll onto next case

[Midas79]

How often do cases in front of SCOTUS get settled after oral arguments but before an opinion is issued? Do the Justices frown on this given their vast caseload and limited resources, or is it similar to lower courts where they are glad it happened so they can devote said resources elsewhere?

 

after oral arg, very rarely. after cert grant but before oral argument, rarely.  there was recent case involving NY gun laws, where NY passed a revision to litigated law that mooted the case after cert grant but before oral arg.  some judges get pissed (Alito), most just roll onto next case

 

The reason I ask is because if settling after oral arguments is difficult or impossible, there would be a de facto deadline for settlement. That could even be before the election if Collins gets scheduled for oral arguments in October.

 

Of course, we're already at the "rarely" stage since cert has been granted.

 

I just like to brainstorm on here, this line of thinking could be a longshot or just flat-out wrong.

[Guest cherzeca]

How often do cases in front of SCOTUS get settled after oral arguments but before an opinion is issued? Do the Justices frown on this given their vast caseload and limited resources, or is it similar to lower courts where they are glad it happened so they can devote said resources elsewhere?

 

after oral arg, very rarely. after cert grant but before oral argument, rarely.  there was recent case involving NY gun laws, where NY passed a revision to litigated law that mooted the case after cert grant but before oral arg.  some judges get pissed (Alito), most just roll onto next case

 

The reason I ask is because if settling after oral arguments is difficult or impossible, there would be a de facto deadline for settlement. That could even be before the election if Collins gets scheduled for oral arguments in October.

 

Of course, we're already at the "rarely" stage since cert has been granted.

 

I just like to brainstorm on here, this line of thinking could be a longshot or just flat-out wrong.

 

it is highly unusual for scotus to get a commercial case with so much value at stake to the parties before it...most cases they decide involve various forms of civil liberties, statutes that may govern the economy broadly (so important) but having limited value to the private parties before it...so parties are not usually playing high stakes poker before scotus, at least not in a commercial sense...so the commercial impetus to settle is not great for vast majority of scotus cases