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

[Luke 532]

Next week... 

-Oral arguments in Sweeney's court on Tuesday 

-Gaby Heffesse from ACG Analytics doing another interview on Real Vision

 

[Guest cherzeca]

Next week... 

-Oral arguments in Sweeney's court on Tuesday 

-Gaby Heffesse from ACG Analytics doing another interview on Real Vision

 

not clear that Sweeney's court will have a recording.  someone may have to order a transcript from the recorder.

[investorG]

agree that this '21-22 timeframe is very disappointing.  calabria seems to be dampening expectations, which he probably thinks is to his benefit.  could also indicate an expectation that SCOTUS will take up the Collins APA cert petition and that nothing will be done until that case is decided in summer 20.

 

seems somewhat clear that if the SC takes the case (either APA or constitutional or both), then everything stops until June 2020 (I assume they could still fit this case during this term?).

 

and if they don't take the case, the debate is over would Mnuchin seek a deal in 1h 2020 or is he/Trump too scared of this issue and would -- if they even do anything at all -- wait until after the election for any potential 4th amendment etc...

 

I wish everyone good luck -- looks like we'll need some.

 

I just dont know whether treasury really wants APA claim to be argued so much or just cert granted to set up a settlement negotiation posture.

 

Possibly but to me the base case is trump punted.  Most likely nothing is happening unless court driven over the next 51 weeks (at least).  they likely view 1.5 years of retention of capital + a potential 4th amendment in the lame duck (if that) as enough if they lose the election.  very weak imo because they know full well the nastiness of the NWS.  but it is what it is.  Probably there are many out there (I'm on the fence) that root for the SC to take it up.

[investorG]

Next week... 

-Oral arguments in Sweeney's court on Tuesday 

-Gaby Heffesse from ACG Analytics doing another interview on Real Vision

 

IMO while Sweeney and Lamberth may or may not serve as backups for the real plan and some unknown level of leverage for a potential settlement, I'm guessing based on current experiences that it would take many years from now for a fully-appealed final decision here, even if we somehow won with damages.

[SnarkyPuppy]

Good luck muscleman, you are more brains than muscles these days

 

+1.

 

I think everyone needs to take a step back and realize how directionally positive the last 12 months have been

 

+1

 

I agree that the last 12 months have been positive however does current situation has more risk or less risk compare to 12 months ago? Do we have more variables now that has to go right compare to 12 months ago?

 

Literally everything about this has been directionally derisked relative to 12 months ago.  I think the current situation is a combination of continued terrible reporting/analysts, uncertainty on specific timelines, and movements in quotes affecting opinions.

 

Long term investors who own these securities are not touching their positions.  The remaining effective “free float” is volatile given the free float is dominated by LIFO investors and short term traders who aren’t able to look out 3-5 years, and are unfamiliar with the practical constraints involved in removing F&F from conservatorship. 

 

Add in some uncertainty and confusion caused by scotus cert request, uncertainty on specific capital requirements, uncertainty on specific mechanics of recap, and the initial scary optics associated with the short term increase in liquidation preference on top of the fact that we are late cycle- and it’s not difficult to understand why there’s been an impact to the quotes.  But it’s important to understand whether any of these are critically impactful to solving for the practical constraints involved in raising private capital and ending conservatorship. 

 

FNMAM ($50 par value, 5.81% fixed) closed with a quotation of $18.00.  I think sellers are absolutely nuts if they are selling these things because there is uncertainty regarding whether this is resolved in 2022 or 2023.  At $18, if it takes 5 years your cagr is 22.6%.  If it takes 10 years your cagr is 10.8%.  Risk = permanent loss of capital, which isn’t relevant to whether this is resolved 3, 4 or 5 years from now. 

[allnatural]

In the last month we have seen 2 "political" investments blow up in investors face. First PCG, now Intelsat (down over 50% in 3 days). The distressed / credit investor crowd has been involved in all 3 of these situations all year. It isnt rocket science to figure out why the GSEs PFDs have been getting smoked during the same week as the Intelsat blow up. The shareholder overlap is enormous and after 2 political blowups they are de-risking and taking one of their only winners for the year (GSEs) off the table. There is a reason PFDs are down almost 2x as much as common in the last few days as most of these funds are weighted towards the PFDs. Calabria being wishy washy on timing only adds salt to the wound at this point.

 

Check out the share price performance of the PFDs during the week of the PCG blow up as well.

[investorG]

Good luck muscleman, you are more brains than muscles these days

 

+1.

 

I think everyone needs to take a step back and realize how directionally positive the last 12 months have been

 

+1

 

I agree that the last 12 months have been positive however does current situation has more risk or less risk compare to 12 months ago? Do we have more variables now that has to go right compare to 12 months ago?

 

Literally everything about this has been directionally derisked relative to 12 months ago.  I think the current situation is a combination of continued terrible reporting/analysts, uncertainty on specific timelines, and movements in quotes affecting opinions.

 

Long term investors who own these securities are not touching their positions.  The remaining effective “free float” is volatile given the free float is dominated by LIFO investors and short term traders who aren’t able to look out 3-5 years, and are unfamiliar with the practical constraints involved in removing F&F from conservatorship. 

 

Add in some uncertainty and confusion caused by scotus cert request, uncertainty on specific capital requirements, uncertainty on specific mechanics of recap, and the initial scary optics associated with the short term increase in liquidation preference on top of the fact that we are late cycle- and it’s not difficult to understand why there’s been an impact to the quotes.  But it’s important to understand whether any of these are critically impactful to solving for the practical constraints involved in raising private capital and ending conservatorship. 

 

FNMAM ($50 par value, 5.81% fixed) closed with a quotation of $18.00.  I think sellers are absolutely nuts if they are selling these things because there is uncertainty regarding whether this is resolved in 2022 or 2023.  At $18, if it takes 5 years your cagr is 22.6%.  If it takes 10 years your cagr is 10.8%.  Risk = permanent loss of capital, which isn’t relevant to whether this is resolved 3, 4 or 5 years from now.

 

this analysis would make good sense if par value was guaranteed --  which is not the case even in 2022-2023+.    Calabria's lazy time line introduces arguably unnecessary political and economic risk for the reasons we all know well.  I'm guessing Calabria was surprised at the 2 day drawdown bc he thought the consent decree info would overwhelm the timing delay.

[investorG]

In the last month we have seen 2 "political" investments blow up in investors face. First PCG, now Intelsat (down over 50% in 3 days). The distressed / credit investor crowd has been involved in all 3 of these situations all year. It isnt rocket science to figure out why the GSEs PFDs have been getting smoked during the same week as the Intelsat blow up. The shareholder overlap is enormous and after 2 political blowups they are de-risking and taking one of their only winners for the year (GSEs) off the table. There is a reason PFDs are down almost 2x as much as common in the last few days as most of these funds are weighted towards the PFDs. Calabria being wishy washy on timing only adds salt to the wound at this point.

 

Check out the share price performance of the PFDs during the week of the PCG blow up as well.

 

there are also fundamental reasons regarding capital raise timing why the jr pref would underperform common lately apart from the other perhaps valid distressed items you cite. 

[Luke 532]

In the last month we have seen 2 "political" investments blow up in investors face. First PCG, now Intelsat (down over 50% in 3 days). The distressed / credit investor crowd has been involved in all 3 of these situations all year. It isnt rocket science to figure out why the GSEs PFDs have been getting smoked during the same week as the Intelsat blow up. The shareholder overlap is enormous and after 2 political blowups they are de-risking and taking one of their only winners for the year (GSEs) off the table. There is a reason PFDs are down almost 2x as much as common in the last few days as most of these funds are weighted towards the PFDs. Calabria being wishy washy on timing only adds salt to the wound at this point.

 

Check out the share price performance of the PFDs during the week of the PCG blow up as well.

 

All the more reason to discount recent price action in the GSE prefs.

[orthopa]

Good luck muscleman, you are more brains than muscles these days

 

+1.

 

I think everyone needs to take a step back and realize how directionally positive the last 12 months have been

 

+1

 

I agree that the last 12 months have been positive however does current situation has more risk or less risk compare to 12 months ago? Do we have more variables now that has to go right compare to 12 months ago?

 

Literally everything about this has been directionally derisked relative to 12 months ago.  I think the current situation is a combination of continued terrible reporting/analysts, uncertainty on specific timelines, and movements in quotes affecting opinions.

 

Long term investors who own these securities are not touching their positions.  The remaining effective “free float” is volatile given the free float is dominated by LIFO investors and short term traders who aren’t able to look out 3-5 years, and are unfamiliar with the practical constraints involved in removing F&F from conservatorship. 

 

Add in some uncertainty and confusion caused by scotus cert request, uncertainty on specific capital requirements, uncertainty on specific mechanics of recap, and the initial scary optics associated with the short term increase in liquidation preference on top of the fact that we are late cycle- and it’s not difficult to understand why there’s been an impact to the quotes.  But it’s important to understand whether any of these are critically impactful to solving for the practical constraints involved in raising private capital and ending conservatorship. 

 

FNMAM ($50 par value, 5.81% fixed) closed with a quotation of $18.00.  I think sellers are absolutely nuts if they are selling these things because there is uncertainty regarding whether this is resolved in 2022 or 2023.  At $18, if it takes 5 years your cagr is 22.6%.  If it takes 10 years your cagr is 10.8%.  Risk = permanent loss of capital, which isn’t relevant to whether this is resolved 3, 4 or 5 years from now.

 

Agree with nearly all of this. Many of the LIFOs and honestly I think some of those that maybe have held for a long time but had maybe 2-3-5% of the portfolio in it and are really following the trade have lost patience and moved on. In May it looked like this could be a year end early 2020 thing. While things have gone very much so in the right direction the thought of waiting another 3-4 years is probably too much for many. If your cost basis is in the low single digits sure hold on but I can see someone who bought at 9-10 saying fuck it and just getting out thinking there is a better trade out there. It is late cycle and market near all time highs so other options are not as plentiful as mentioned by some but there is certainly comfort in cash for those who dont want to wait.

 

As a long time holder myself  I certainly sympathize with those who have sold out of frustration. I continue to think (hope) Calabria will under promise and over deliver but the more he talks its becoming harder to know which time line to believe and which avenue to model/think about. We went from wanting a single PSPA agreement and recap as fast as possible to signalling there will be multiple more, delays and more conflicting statements ever since the treasury plan was released. I think all the receivership talk is BS and can see through that but the copious amount of time all the steps could take up with capital rule, PSPA amendments, capital restoration plans, consent decree implementation, capital raise, etc it gets annoying. We all know its best to literally just pack this away and just check back in a couple years but its already been a bunch of years for a lot of us and just getting a little old waiting.

 

I do wonder why Calabria has become so vague and has been expanding publicly on time lines. This certainly has been a change. Some have speculated things have purposefully been delayed to not jeopardize the election but we all know the consequences of what could happen if trump doesn't win.  I guess we wont know until we know.

[orthopa]

This is mainly a question for Midas and anyone who wants to chime in but I'm admittedly getting a little confused with the capital necessary to release with consent decree which to me seems like the next situation outside of another PSPA amendment that could vault the preferred closer to par. Couple of questions.

 

1. Do we not know yet what the capital level will be to release on consent decree because the capital rule isnt done yet?

 

2. I know you posted the different capital levels before but we do not know yet which level; under capitalized, critically undercapitalized, etc Calabria will choose to release and the amount for each level correct?

 

3. Fannie is at 10.3 B of capital now so a level of ~20B would be accomplished mid June I know that has been speculated by some but others have mentioned the current earnings cap of 45B combined between the two as a target before consent decree agreement and new PSPA. What are your thoughts on that?

 

Thanks

[Guest cherzeca]

very interesting post allnatural.  I agree that these two blowups may have accentuated junior pref angst. 

 

to my mind, calabria needs to hire a financial advisor soon and let them do its work.  I am more than tired of having this phd know-everything trying to prove he knows financial capital markets as well as everything else.

[orthopa]

very interesting post allnatural.  I agree that these two blowups may have accentuated junior pref angst. 

 

to my mind, calabria needs to hire a financial advisor soon and let them do its work.  I am more than tired of having this phd know-everything trying to prove he knows financial capital markets as well as everything else.

 

Amen to that. He has been talking his mouth off lately but doesn't seem to know any more about what will happen then we do. Every other day you get new info but its convoluted and contradicts the day before.

 

InvestorG mentioned this too but the 23-24 timeline gives much more time for retained capital so apples to apples common has much higher upside with all of those retained earnings then preferred to par. Even better would be a preferred to common conversion and then they can retain all the earnings they want.

[Luke 532]

Josh Rosner: A brief we sent yesterday morning re #FHFA #Calabria & context of his speech on Wednesday.

 

Link... https://www.scribd.com/document/435137928/Context-FHFA-Dir-Calabria-s-Latest-Comments-the-Non-Fake-News-Version

 

PDF attached...

435137928-Context-FHFA-Dir-Calabria-s-Latest-Comments-the-Non-Fake-News-Version.pdf

[Luke 532]

Josh Rosner: A brief we sent yesterday morning re #FHFA #Calabria & context of his speech on Wednesday.

 

Link... https://www.scribd.com/document/435137928/Context-FHFA-Dir-Calabria-s-Latest-Comments-the-Non-Fake-News-Version

 

PDF attached...

 

And for what it's worth, Tim Rood was in attendance and agrees with Rosner's analysis...

I was there and agree with your analysis

[allnatural]

Rosner believes there will be a q1 pspa amendment to write down the senior pfds as precursor to capital restoration plan...

[Midas79]

This is mainly a question for Midas and anyone who wants to chime in but I'm admittedly getting a little confused with the capital necessary to release with consent decree which to me seems like the next situation outside of another PSPA amendment that could vault the preferred closer to par. Couple of questions.

 

1. Do we not know yet what the capital level will be to release on consent decree because the capital rule isnt done yet?

 

2. I know you posted the different capital levels before but we do not know yet which level; under capitalized, critically undercapitalized, etc Calabria will choose to release and the amount for each level correct?

 

3. Fannie is at 10.3 B of capital now so a level of ~20B would be accomplished mid June I know that has been speculated by some but others have mentioned the current earnings cap of 45B combined between the two as a target before consent decree agreement and new PSPA. What are your thoughts on that?

 

Thanks

 

The main problem is that we don't really know how much capital Calabria will insist on before releasing FnF under a consent decree. The common knowledge seems to be the current statutory minimum (around $23B for Fannie and $17B for Freddie), but I don't think this is necessarily true. That's still a leverage ratio of 137:1, and with Calabria continuing to mention that ratio, I don't see something higher than 100:1 being enough.

 

1. I don't think the capital rule has to spell out the release threshold. It will only determine the levels for FnF's capitalization standard (Adequately Capitalized, Undercapitalized, Significantly Undercapitalized). The fourth (Critically Undercapitalized) is half the statutory minimum by HERA, and is not subject to Calabria's determination.

2. Correct. We can be certain that the release threshold will be lower than Adequately Capitalized, but not which level below it. It won't necessarily have to be right at one of those levels, but I would be surprised if it wasn't. Calabria's oversight over FnF changes form at each level.

3. I think the "statutory min of $40B for release" narrative came from the $45B earnings cap in the September letter agreements. But in my opinion it's a coincidence. Also, the PSPA amendment needs to come before the consent decree, as do resolutions to the lawsuits. The seniors represent such a drag on core capital that they cannot remain in place, otherwise FnF remain stuck in Critically Undercapitalized.

 

I know you didn't ask this, but I still would rather hold at least 90% prefs (vis a vis the commons) because even if release is granted at the statutory minimum, I believe that a conversion is highly likely, which would cement the juniors' outperformance. There are plenty of reasons for Calabria to offer a conversion, and no good ones for him not to.

[Wiggins]

There was news published about Calabria and/or Mnuchin's comments in June that made the security prices go down, a lot. Then a month or two later there were stories that made the prices recover virtually fully and commons perhaps even more. This has repeated itself on a smaller scale several times. Now, there are comments by Calabria -filtered through media, of course- that have made the prices swoon once again. If you KNEW when/how/why these stories were being published and traded appropriately, you could do quite well. How much do you want to bet that comments will come out in the next few days or weeks that will reverse the trend?

 

The main point is not that I know when this information comes out and thus whether or not to trade on it; I don't have any information on that whatsoever. I don't have inside information at all. The point is that the real information has been incredibly positive over time and continues to trend upwards. So, just sit tight and weather the storm. If there is another investment out there that's better, then by all means go for it. But I still like JPS here, a lot.

[Guest cherzeca]

Rosner believes there will be a q1 pspa amendment to write down the senior pfds as precursor to capital restoration plan...

 

I haven't thought about this sequencing before, but it would be impossible for the GSEs to present their capital restoration plans without knowing the disposition of the senior preferred.  I have been thinking that the nuking of the senior preferred would occur late in the process, simply because there would be no reason for the govt to do it any sooner, but this would be one reason....to tell the GSEs to work up their plans without the senior prefs outstanding or based upon the assumption the senior prefs are not outstanding...and if based on that assumption, then the cat is out of the bag even if the actual nuking occurs later.

[Guest cherzeca]

"I know you didn't ask this, but I still would rather hold at least 90% prefs (vis a vis the commons) because even if release is granted at the statutory minimum, I believe that a conversion is highly likely, which would cement the juniors' outperformance. There are plenty of reasons for Calabria to offer a conversion, and no good ones for him not to."

 

I agree with this, but more so than calabria, I believe the financial advisors to fhfa and GSEs will think so, mainly for two reasons.

 

first, the juniors are high interest paper and can be replaced in the capital structure at a cheaper cost.  while I dont think new preferred will be offered out of the gate, I do believe that the financial advisors will want to pave the way out of the gate to issue new preferred later down the line. 

 

second, I do believe that the financial advisors will want the common to pay a small dividend.  this will expand the universe of potential buyers, and you cant pay a dividend on the common without paying dividends on the juniors, and to do so would be highly inefficient.

[Midas79]

I say that Calabria will be offering the conversion because he, and not the boards of directors, will be the one making the final decision. I certainly agree with your two reasons.

 

Another one is that if FnF's capital requirement happens to rise in the future, it's much easier to sell new preferred shares than new common shares on a piecemeal basis. The first time you try to raise commons for that purpose it works, but any time after that each potential group of investors won't know if the same thing will happen to them again. All the more reason to clear out the existing prefs, especially in a way that doesn't cost FnF any cash.

[allnatural]

If anyone is wondering why the GSEs got slammed this week.. case in point:

 

 

Charles Gasparino  @CGasparino

2m

SCOOP-Major hedge funds experiencing large losses @Chesapeak @PGE4Me and @intelstat implode over past month. Shares and bond prices of these companies hit lows over a variety of issues impacting major hedge funds, causing hedge fund route even as mkt average move to new highs

 

Charles Gasparino  @CGasparino

2m

(cont) PointState Capital is said to be one hedge fund long Intelstat positions, suffering losses but is said not to be liquidating major positions. Other hedge funds appear to be puking @FannieMae preferred to make up for losses contributing to lower prices more now @FoxBusiness

 

Charles Gasparino

@CGasparino

$FNMA $I $PCG $CHK

 

[Luke 532]

In the last month we have seen 2 "political" investments blow up in investors face. First PCG, now Intelsat (down over 50% in 3 days). The distressed / credit investor crowd has been involved in all 3 of these situations all year. It isnt rocket science to figure out why the GSEs PFDs have been getting smoked during the same week as the Intelsat blow up. The shareholder overlap is enormous and after 2 political blowups they are de-risking and taking one of their only winners for the year (GSEs) off the table. There is a reason PFDs are down almost 2x as much as common in the last few days as most of these funds are weighted towards the PFDs. Calabria being wishy washy on timing only adds salt to the wound at this point.

 

Check out the share price performance of the PFDs during the week of the PCG blow up as well.

 

All the more reason to discount recent price action in the GSE prefs.

 

Allnatural nailed it!  Well done!

[SnarkyPuppy]

The clown is probably getting his “scoop” from this thread

[Guest cherzeca]

great recent posting all!

 

Luke, did Todd take these notes or are they notes written by some other party that Todd got hold of?

 

edit:  and who is autonomous?