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

[allnatural]

I have to believe that Mnuchin is sophisticated enough to understand the snr pfds can simply not exist in any recap plan for this to work. The 6b to 150b # Otting mentioned would balloon to $340b. Additionally, what sane investor would ever touch these entities with those over hanging seniors out there. Not to mention the ongoing litigation overhang that one day  any recap investor may be on the hook for a $125-180b liability.

 

The simplest solution is to simply declare it paid off in full (par+interst), and monetize the warrants. Thats a total income of ~$400b for the taxpayers. Thats more than enough to celebrate if im in the admin.

[Guest cherzeca]

@rros

 

to be clear, in both of my scenarios, the senior preference is eliminated.  by any recap plan that raise $150B+ of new capital, or by the court.

 

fwiw, I think trading up to 75% for the juniors would be a target (which is almost a double from here)...meaning that I would think hard about selling unless that target is hit, if an admin plan or court order makes it quite likely that senior pref would be eliminated in 3-6 months.

 

any other views?

 

[rros]

@rros

 

to be clear, in both of my scenarios, the senior preference is eliminated.  by any recap plan that raise $150B+ of new capital, or by the court.

 

fwiw, I think trading up to 75% for the juniors would be a target (which is almost a double from here)...meaning that I would think hard about selling unless that target is hit, if an admin plan or court order makes it quite likely that senior pref would be eliminated in 3-6 months.

 

any other views?

I personally don't think on those terms... price targets. Maybe that is a mistake. If the Srs. were to disappear I would have one less reason to sell. The ultimate gift here is solid collateral (and a great yield). Should these shares get relisted and my broker doesn't provide leverage, then I would reconsider. Maybe I am making a big mistake thinking this way.

Reading others answers I now understand better... still no idea where the Jrs. may trade in each case.

[Eye4Valu]

I invite the board to respond to this query.

 

I am trying to assess what is a realistic near term target price for the prefs under various scenarios.  let's take a current price of 40% of par (which is fnmas).

 

let's assume two scenarios: first, that an administrative plan is announced that indeed seeks to implement a moelis blueprint type plan...nothing is to happen for a few months because it is conditioned on settlement of all litigation, but the proposal is to negotiate a 4th A that rolls back NWS and deems senior prefs paid off.  second, collins en banc decides that NWS violates APA and remands case down to district court for relief (so that actual invalidation of NWS is likely to be relief, but requires district court to issue order).

 

essentially these two scenarios are the same, senior pref very likely to go away in a 3-6 month or so time frame.

 

after either of these announcements, what would you expect a pref which is trading at 40% to trade up to?

 

First Scenario: 72% of par

 

Second Scenario: 85% of par

[DRValue]

@rros

 

to be clear, in both of my scenarios, the senior preference is eliminated.  by any recap plan that raise $150B+ of new capital, or by the court.

 

fwiw, I think trading up to 75% for the juniors would be a target (which is almost a double from here)...meaning that I would think hard about selling unless that target is hit, if an admin plan or court order makes it quite likely that senior pref would be eliminated in 3-6 months.

 

any other views?

 

I expect a pop but the price should (theoretically), settle to the discounted value of future dividends assuming they are to start again. I haven't worked this value out. I dent expect them to trade close to par until:

 

[*]Dividends resume, or

[*]Redemption is announced

[SnarkyPuppy]

At this point, assuming the politico tapes are real, what could possibly be meant by the $150-200bn capital statement other than recap release?

 

I understand that the "upside" has various scenarios which I don't pretend I can handicap accurately.  But with respect to downside... what is the risk here aside from a recap plan that is intended to kill the GSEs (uncompetitive - but this would be entirely irrational given govt warrants) or tail risk (trump + pence impeachment and munchin removal?).

 

What's going on here?!

[Cox022]

The figures I am referencing were the result of a hasty google search and could be wrong.

 

The biggest corporate bond issuance to date is $50B, and in 2018, across the entire globe, IPO proceeds were $200B.  The largest single IPO in history was Alibaba, raising $25B in proceeds in ~2014.

 

 

These figures make me think that for the GSE's to raise the capital they need, they require all the help they can get.  In my view, this makes it more likely Treasury treats their preferred stock in such a way to help raise as much capital as possible.  I dont know exactly how they do that, but in my view - whatever that action is - is favorable to our position.

 

Maybe that's too much a leap in logic but it makes sense at the moment.

 

[DRValue]

The figures I am referencing were the result of a hasty google search and could be wrong.

 

The biggest corporate bond issuance to date is $50B, and in 2018, across the entire globe, IPO proceeds were $200B.

 

 

These figures make me think that for the GSE's to raise the capital they need, they require all the help they can get.  In my view, this makes it more likely Treasury treats their preferred stock in such a way to help raise as much capital as possible.  I dont know exactly how they do that, but in my view - whatever that action is - is favorable to our position.

 

Maybe that's too much a leap in logic but it makes sense at the moment.

 

I agree. Mark calabria has critiqued the 10% rate and said it's too high. Also there's the "let the gse's pay us back act" which specified a rate of 5%. It just seems like a really simple way to get them tonnes of capital.

 

Hopefully it goes our way but who knows.

[TwoCitiesCapital]

The figures I am referencing were the result of a hasty google search and could be wrong.

 

The biggest corporate bond issuance to date is $50B, and in 2018, across the entire globe, IPO proceeds were $200B.  The largest single IPO in history was Alibaba, raising $25B in proceeds in ~2014.

 

 

These figures make me think that for the GSE's to raise the capital they need, they require all the help they can get.  In my view, this makes it more likely Treasury treats their preferred stock in such a way to help raise as much capital as possible.  I dont know exactly how they do that, but in my view - whatever that action is - is favorable to our position.

 

Maybe that's too much a leap in logic but it makes sense at the moment.

 

Agreed. My guess is that it won't all be raised at once. It would be nice if any money paid after the 10% moment were returned, but that may not happen without the courts.

 

Seems like the most straightforward action would be:

Eliminate the senior preferred.

Convert govt warrants

Convert higher-yielding juniors into common.

Re-issue common equity, preferreds at appropriate yields, and debt. Restart common dividends

Follow-on equity offering

 

Those things, along with retained earnings, might get us there in the next 2 years.

[Guest cherzeca]

I invite the board to respond to this query.

 

I am trying to assess what is a realistic near term target price for the prefs under various scenarios.  let's take a current price of 40% of par (which is fnmas).

 

let's assume two scenarios: first, that an administrative plan is announced that indeed seeks to implement a moelis blueprint type plan...nothing is to happen for a few months because it is conditioned on settlement of all litigation, but the proposal is to negotiate a 4th A that rolls back NWS and deems senior prefs paid off.  second, collins en banc decides that NWS violates APA and remands case down to district court for relief (so that actual invalidation of NWS is likely to be relief, but requires district court to issue order).

 

essentially these two scenarios are the same, senior pref very likely to go away in a 3-6 month or so time frame.

 

after either of these announcements, what would you expect a pref which is trading at 40% to trade up to?

 

First Scenario: 72% of par

 

Second Scenario: 85% of par

 

I think this makes sense.  while I don't think the prefs ever reach par until they see a redemption notice at par (or a very attractive conversion offer), I think getting a 39% return (72%--->par) and a 18% return (85%-->par) after these two events is quite possible.  the 85% may be high, but my thinking is that with prefs still under 40% now and the horizon for these two events becoming somewhat clearer, I would think prefs still have much upside in the near term (3 months)

[orthopa]

I invite the board to respond to this query.

 

I am trying to assess what is a realistic near term target price for the prefs under various scenarios.  let's take a current price of 40% of par (which is fnmas).

 

let's assume two scenarios: first, that an administrative plan is announced that indeed seeks to implement a moelis blueprint type plan...nothing is to happen for a few months because it is conditioned on settlement of all litigation, but the proposal is to negotiate a 4th A that rolls back NWS and deems senior prefs paid off.  second, collins en banc decides that NWS violates APA and remands case down to district court for relief (so that actual invalidation of NWS is likely to be relief, but requires district court to issue order).

 

essentially these two scenarios are the same, senior pref very likely to go away in a 3-6 month or so time frame.

 

after either of these announcements, what would you expect a pref which is trading at 40% to trade up to?

 

First Scenario: 72% of par

 

Second Scenario: 85% of par

 

I think this makes sense.  while I don't think the prefs ever reach par until they see a redemption notice at par (or a very attractive conversion offer), I think getting a 39% return (72%--->par) and a 18% return (85%-->par) after these two events is quite possible.  the 85% may be high, but my thinking is that with prefs still under 40% now and the horizon for these two events becoming somewhat clearer, I would think prefs still have much upside in the near term (3 months)

 

Just pondering with you but how do the preferred not get par in a recapitalization scenario? I think whether or not the dividend ever gets turned back on is highly up for debate due to restructuring/retirement but as soon as the gov exercises the warrants or NWS stops/released from conservatorship how is the par value after relase for that  entity not valid?  The div would have to be declared by the board and surely not until capital is built back.  Value is not based on earnings and there is a contractual par value in the preferred circular offer sheet that reads for example "Preferred stock is redeemable at its stated value at the option of Fannie Mae on or after specified dates"

 

If the company is released how much of an arbitrage opportunity can their be when there is only way to remove the preferred...at par.  So either it stays as is and divs get turned back or, or it goes away at full price. Time of course is highly up for debate here but especially now I see everyone of my par holdings worth their full value over time.

 

Lastly Otting/FHFA/Treasury has only surprised to the upside and in my humble belief it will continue this way.

[Eye4Valu]

I invite the board to respond to this query.

 

I am trying to assess what is a realistic near term target price for the prefs under various scenarios.  let's take a current price of 40% of par (which is fnmas).

 

let's assume two scenarios: first, that an administrative plan is announced that indeed seeks to implement a moelis blueprint type plan...nothing is to happen for a few months because it is conditioned on settlement of all litigation, but the proposal is to negotiate a 4th A that rolls back NWS and deems senior prefs paid off.  second, collins en banc decides that NWS violates APA and remands case down to district court for relief (so that actual invalidation of NWS is likely to be relief, but requires district court to issue order).

 

essentially these two scenarios are the same, senior pref very likely to go away in a 3-6 month or so time frame.

 

after either of these announcements, what would you expect a pref which is trading at 40% to trade up to?

 

First Scenario: 72% of par

 

Second Scenario: 85% of par

 

I think this makes sense.  while I don't think the prefs ever reach par until they see a redemption notice at par (or a very attractive conversion offer), I think getting a 39% return (72%--->par) and a 18% return (85%-->par) after these two events is quite possible.  the 85% may be high, but my thinking is that with prefs still under 40% now and the horizon for these two events becoming somewhat clearer, I would think prefs still have much upside in the near term (3 months)

 

Just pondering with you but how do the preferred not get par in a recapitalization scenario? I think whether or not the dividend ever gets turned back on is highly up for debate due to restructuring/retirement but as soon as the gov exercises the warrants or NWS stops/released from conservatorship how is the par value for that release entity not valid?  The div would have to be declared by the board and surely not until capital is built back.  Value is not based on earnings and there is a contractual par value in the preferred circular offer sheet that reads for example "Preferred stock is redeemable at its stated value at the option of Fannie Mae on or after specified dates"

 

If the company is released how much of an arbitrage opportunity can their be when there is only way to remove the preferred...at par.  So either it stays as is and divs get turned back or, or it goes away at full price. Time of course is highly up for debate here but especially now I see everyone of my par holdings worth their full value over time.

 

Lastly Otting/FHFA/Treasury has only surprised to the upside as in my humble belief it will continue this way.

 

I don't disagree with either one of you. Your guess is as good as mine.

[Guest cherzeca]

@orthorpa

 

I think the junior pref value is a combination of divs plus liquidation pref, so that even if the NWS is revoked and the junior prefs become money good in terms of capital structure, they "should" not reach par unless divs are turned on (and could go to premium for some high div series if turned on).  I also think that the treasury will very much want to allow divs to be able to be declared on common, although they will not want to declare common divs while building up capital, so there will be an impetus at some point to either redeem the junior prefs or entice conversion into common at an attractive conversion rate.  the likely preference is to entice conversion since that would not require an outflow of money.

 

 

[Wiggins]

Maybe possibly we'll get an answer sooner....

https://financialservices.house.gov/uploadedfiles/2019.1.25.ltr_to_comptrollerotting.fhfa.hera.pdf

 

First a comment: just want to reiterate how much I enjoy ALL the comments I read here daily, including the esp. legal and other thoughts of cherzeca. Also appreciated Midas' in-depth assessment recently.

 

Question: Having agreed with all the positive commentary as of late, how can we get screwed? The way I see it would be FHFA selling the (core) assets and leaving a worthless shell behind, which HERA says they can do. Yes I know: that is exceedingly unlikely and would bolster lawsuits, etc, but it's the #1 way I can see us getting screwed. Any other thoughts? That's my principal concern at the moment. I'm not ready to count the chips yet.

 

I thought the 5th circuit was huge and thought Judge Jones comments cut deep (in a great way). Haven't had much other commentary because of the great comments here and I can't add anything more. I've already shared my thoughts on much of this, including Calabria. I find the lawsuits to be key, even if just a threat in the background. Overall, IMHO it's not looking just good ...but great. But that just makes it all the more important to try hard and negate the thesis.

 

 

Again, really enjoying the comments and thanks to anyone who takes on the above question...

[Guest cherzeca]

Maybe possibly we'll get an answer sooner....

https://financialservices.house.gov/uploadedfiles/2019.1.25.ltr_to_comptrollerotting.fhfa.hera.pdf

 

First a comment: just want to reiterate how much I enjoy ALL the comments I read here daily, including the esp. legal and other thoughts of cherzeca. Also appreciated Midas' in-depth assessment recently.

 

Question: Having agreed with all the positive commentary as of late, how can we get screwed? The way I see it would be FHFA selling the (core) assets and leaving a worthless shell behind, which HERA says they can do. Yes I know: that is exceedingly unlikely and would bolster lawsuits, etc, but it's the #1 way I can see us getting screwed. Any other thoughts? That's my principal concern at the moment. I'm not ready to count the chips yet.

 

I thought the 5th circuit was huge and thought Judge Jones comments cut deep (in a great way). Haven't had much other commentary because of the great comments here and I can't add anything more. I've already shared my thoughts on much of this, including Calabria. I find the lawsuits to be key, even if just a threat in the background. Overall, IMHO it's not looking just good ...but great. But that just makes it all the more important to try hard and negate the thesis.

 

 

Again, really enjoying the comments and thanks to anyone who takes on the above question...

 

always good to invert.  the most obvious way we get screwed is the the collins en banc opinion rejects Ps claims, which would come to me as a surprise, but I was surprised when the Perry decision came down.  then we would be left once again to a possibly protracted admin which may be resisted (to no great effect imo) by congress.

 

as to collins I have come to an additional view.

 

one might have thought before argument that after being rejected by 5 sister circuits, the APA claim would have been the “harder” claim, and given that neither fhfa nor treasury would defend constitutionality of fhfa structure, the constitutional claim would have been the “easier” claim. after listening to the oral argument again, the reverse appears to be true. at least one judge was hung up on redressability of relief regarding the constitutional claim, whereas with Judge Jones leading the charge, the conservator’s authority to agree to NWS was heavily challenged.

 

IF the court finds for Ps on the APA claim, I expect the court will not address the constitutional claim since the relief required to be granted in the case of the APA claim is all of the relief Ps are seeking (revoke NWS). courts will avoid constitutional questions if possible. moreover, the court likely is keenly aware that All-American is challenging the constitutionality of the CFPB structure before 5th circuit (same basic constitutional claim as in collins), with argument scheduled in March as I recall. so no need to reach out to address the constitutional claim in collins if relief is to be granted on the APA claim.

 

IF this is true, then the court could issue an opinion more quickly than one might otherwise expect, since it would be a more straightforward opinion, and the reasoning of Judge Willet’s dissent in the merits panel opinion is available to serve as an en banc majority opinion.

[Guest cherzeca]

@wiggins

 

I thought the joint letter from waters and brown was interesting insofar as it wasn't really confrontational.  it is asking for the plan that Otting is talking about, but that certainly fits within congress' oversight responsibility.  what you didn't see was ms waters expressing affront that her power as head of House FSC was being usurped.

 

I wouldn't be surprised if you see a state banking committee letter soon to follow, which may be far more confrontational.

[Eye4Valu]

I know a lot of the Twitterverse and Fanniegate supporters have pointed out for some time that POTUS could utilize proceeds from the warrants for the now infamous wall, and perhaps more apropos, infrastructure spending. I haven't been overly optimistic about this possibility due to the status quo, but the status quo seems to be changing. With POTUS agreeing to reopen the gov, and with wall funding still seemingly unsecured, I wonder if there is some possibility that when Otting releases details of the plan, some of the proceeds from the warrants could be earmarked for the wall. Just a thought.

[hardincap]

Maybe possibly we'll get an answer sooner....

https://financialservices.house.gov/uploadedfiles/2019.1.25.ltr_to_comptrollerotting.fhfa.hera.pdf

 

doubtful otting is at liberty to reveal details of the plan before white house is ready to release it

[Midas79]

Maybe possibly we'll get an answer sooner....

https://financialservices.house.gov/uploadedfiles/2019.1.25.ltr_to_comptrollerotting.fhfa.hera.pdf

 

doubtful otting is at liberty to reveal details of the plan before white house is ready to release it

 

But is he at liberty to ignore the request in this letter? Maybe by a letter-of-the-law argument, but this isn't the time to be making enemies unnecessarily.

 

It sounds like the plan is mostly hashed out, otherwise Otting wouldn't have mentioned it with the "few weeks" timeline. February 1 is two weeks after that meeting, so it might be as good a time as any to release whatever details they were going to release anyway, and have that be the response to this letter.

[hardincap]

i expect otting to reply with the same vague outlines that he gave at fhfa town hall, and repeat that details are forthcoming. the details are a huge deal, i dont think they will be first released in a letter reply format to a congressperson asking for more info

[Guest cherzeca]

Smoking Gun thread on Google Group

 

https://groups.google.com/forum/#!topic/fannie-and-freddie-preferreds/8NKN7kSK500

 

Additional related email:

This just 75 Days before the Net Worth Sweep was enacted.

 

To: Mary Miller

From: Michael Stegman

FHF A-Related Discussion at June 25 Morning Meeting June 25, 2012

 

…..................DeMarco no longer sees the urgency of amending the PSP As this year. He has raised two competing reasons for this new position: ( 1) the GSEs will be generating large revenues over the coming years, thereby enabling them to pay the 10% annual dividend well into the future......

 

I haven't seen this before.  can you provide a copy of the actual full email?

[rros]

Smoking Gun thread on Google Group

 

https://groups.google.com/forum/#!topic/fannie-and-freddie-preferreds/8NKN7kSK500

 

Additional related email:

This just 75 Days before the Net Worth Sweep was enacted.

 

To: Mary Miller

From: Michael Stegman

FHF A-Related Discussion at June 25 Morning Meeting June 25, 2012

 

…..................DeMarco no longer sees the urgency of amending the PSP As this year. He has raised two competing reasons for this new position: ( 1) the GSEs will be generating large revenues over the coming years, thereby enabling them to pay the 10% annual dividend well into the future......

 

I haven't seen this before.  can you provide a copy of the actual full email?

Yes, completely new. This changes the picture slightly (for the better). If DeMarco saw no death spiral coming, why did he agree on the 3rd? And why he went along with the narrative? Does this reinforce the ultra-vires argument? Are his actions becoming fraudulent behavior? Proof that Geithner's Treasury was completely in charge? Would love to see Miller's answer. Treasury had the FULL picture, no doubt. Just a bit earlier (or after, can't remember) Susan McFarland told Miller of the 50 billion in windfall profits coming in 2013. From her own oral testimony, if you all remember.

[rros]

From Thombiz (GG) and here by Emily (thank you).

 

http://fanniefreddiesecrets.org/

unsealed docs July 19, 2017.

 

http://fanniefreddiesecrets.org/wp-content/uploads/2017/07/Email-re-Meeting-Recap-6-25-12.pdf

 

Looks like Tsy and DeMarco had a deep disagreement on principal reduction right before the nws.

[Seahug]

From my calc's the only way prefs can generate significant value is SP's deemed repaid. Not sure how this can be done without congress. From an accounting perspective, payments were considered revenue by the govt and spent, while the SP is a loan from Treasury.  If deemed repaid there will be a writeoff at Treasury. Having said that USG has never seemed averse to funny accounting.

 

If deemed repaid, the main question is when do USG warrants convert to equity - before or after the JP's are converted. If they convert before and the JP's are converted at par at about market (19bn par value fnma pref 17bn fnma mkt cap), then JP's will own 50%+ of FNMA. Does that pass the newspaper test? I think not.

 

However, if FNMA is allowed to earn 50% of the 3% required capital over time (47bn/94bn) the present value of this accrues to JP, common, USG. Depending on sharing there is a reasonable range where JP's can get close to par or even in excess of par. There are too many moving parts to get more precise.

 

If the NWS is suspended (this is almost effectively where we are) - I'd say 50% of par, 20% higher than current prices.

 

If there's a solid indication that the SP is deemed repaid, then I'd agree with 75-80%.

 

Since the JP's are a single class, I can't see them being treated differently (i.e. some converted to equity and some reinstated). This seems to be the case as prices seem to be converging and liquidity may be the main determinant for a price premium.

 

There seems to be much more skepticism now (which is good)/prices are much lower vs when ackman did his pitch. Normally hype has been more a signal to sell...

 

A surefire indication is if lawmakers start buying common and jp's (which they are allowed to do, nice if u can get it).

 

[DRValue]

They can't raise capital with the seniors unpaid and if I was asked to provide a common equity infusion one of my conditions would be that the government exercise their warrants before I invest. They'll exercise before the capital raise.