Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 3569856 times)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12420 on: May 17, 2019, 11:09:06 AM »
I think this is first time anyone in admin has admitted theyve been fully paid back on GSEs bailout (and more)... Phillips from yesterday.. Claims taxpayer IRR is up to 12%.. Easy to write off senior pfds when you share that view.

https://pbs.twimg.com/media/D6yMjFSW0AgFxoT.png:large

where is this quote from?  link to article/report?


allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12421 on: May 17, 2019, 11:11:56 AM »
From the event he spoke at yesterday. He discusses it after the first question on the GSEs.

"@CraigPhillipsDC talking about GSE ($FNMA& $FMCC) reform from 29:30-33:23... vimeo.com/336717859"



I think this is first time anyone in admin has admitted theyve been fully paid back on GSEs bailout (and more)... Phillips from yesterday.. Claims taxpayer IRR is up to 12%.. Easy to write off senior pfds when you share that view.

https://pbs.twimg.com/media/D6yMjFSW0AgFxoT.png:large

where is this quote from?  link to article/report?

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12422 on: May 17, 2019, 11:26:17 AM »
From the event he spoke at yesterday. He discusses it after the first question on the GSEs.

"@CraigPhillipsDC talking about GSE ($FNMA& $FMCC) reform from 29:30-33:23... vimeo.com/336717859"



I think this is first time anyone in admin has admitted theyve been fully paid back on GSEs bailout (and more)... Phillips from yesterday.. Claims taxpayer IRR is up to 12%.. Easy to write off senior pfds when you share that view.

https://pbs.twimg.com/media/D6yMjFSW0AgFxoT.png:large

where is this quote from?  link to article/report?

@ allnatural great find!  I will watch later, but I see that he is being interviewed by vartanian.  that should be nice!

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12423 on: May 17, 2019, 12:02:54 PM »
But my current base case is based on Moelis, so around $18 a share.

I would be very, very careful about basing a common share investment thesis on the Moelis plan, and especially careful about anchoring yourself on that $18 number.

1. There are two projections, and you're taking the higher one ($17.75) and rounding it up while ignoring the lower one ($14.19). Investing based on the best case is a recipe for trouble, especially if you fall victim to the anchoring effect. This zaps a lot of investors that hold on to a bad stock hoping to break even before they sell.

2. Those two prices ($14.19, $17.75) assume that the common stock price rises 10% each of the next two years following recap and release. While this is certainly plausible, optimism doesn't make for a good investment thesis. This is even more true if you plan to sell your position soon after recap and release is complete. The better numbers to anchor on are their IPO prices of $11.73 and $14.67.

3. Moelis assumes that retained earnings all the way through the end of 2021 (and all the way back to Q4 2018) will go towards the recap. This is almost certainly off the table, because it all needs to be done by late 2020 at the latest to assure the Trump administration that they can get it done (and more likely it gets done much sooner to avoid running into the campaign and election cycle). For a new president, keeping FnF in conservatorship is much, much easier than putting them back in. All this means that the capital raise will be even bigger, and the easiest way to do so is to sell more common shares.

4. The new Moelis plan assumes that the juniors will convert at par at the IPO price, for a ratio of either 1.7 to 1 or 2.1 to 1 (divide $25 by the IPO prices). Why would they agree to this when the market ratio is 4.4 to 1 right now? If I was a junior pref holder, and especially if I was a plaintiff, such an offer would insult me; I could have made 2-2.5 times as much if I had converted in the market right now.

5. This plan also has a (then) current price of $1.43, but an IPO price 8-10 times that (and 4-6 times current prices). In reality, offering prices are usually at a discount to that of the market, not at a huge premium. Doing the math on the optimistic scenario (page 29) shows that the final share count breakdown is 1.8B for existing commons, 1.13B for the half of converted juniors, 7.2B for Treasury, and the rest (4.9B) for the new investors. That gives those new investors only about 32.5% of the equity. Are they really going to provide almost all of the recap money for that little of a stake? I wouldn't if I were them, and they are much smarter and more ruthless than me. Treasury needs these new investors; they cannot afford for this to fail. They will need to offer much more than 32.5%. The scenario on page 28 works out to 37%, which is better but still not nearly enough in my opinion. Both of these large effects lead me to believe that the offering price will be much, much lower than Moelis projects, and Treasury will just have to accept the diminishment in warrant value. (as an aside, this is part of why I think Treasury might sell its warrants back to FnF rather than exercise them, but then the floor for the offering price drops out and the commons could lose a lot of money from here)

6. Comparing the projected returns on the prefs and commons is also not completely straight-forward. The naive way to do things is say "prefs go from 40% of par to 100% for a gain of 150%, while the commons go from $2.75 to $17.75 for a gain of 545%". However, taking the conversion into account, the prefs actually go to more than par (around 114%) because they participate in half of the two-year 10% annual gain, which narrows the gap on that end. My other points talk about why I think the $17.75 number is much too high.


To summarize, there are many assumptions in the Moelis plan that lead to their valuations for the common shares, and in my opinion almost every single one of them is either at or above the high end of realistic.

I'll respond to your numbered points. But first to clarify my valuation is based on a moelis share count and my conservative discounted earnings (less than moelis). It's not in front of me but its something like 19 a share. In any case there's plenty of dilution possible before we go to below 1.40. I just see more potential at this point than in prefs.

  • Covered above.
  • methodology above doesn't rely on 10pct projections
  • calabria has said capital raise earliest h1 next year. And the process could take over 2 years. Then again he's said a lot of things.
  • I'd argue the ratio right now won't be the ratio when reform is settled and recap officially commences. Won't the conversion be an offer by the company to pref holders? They can take it or leave it. Management should take common shareholders into account.
  • partly addressed above but agree the number will be what it will be. Big difference between 1.40. What does buffet say about being roughly right rather than precisely wrong? I'm not sure the regulator would permit the companies to repurchase warrants while in conservatorship.
  • in my pref hedge I only assume par. I'd be happy with a pref getting more in that respect.

So summarizing there's a big enough difference between my buy price and maximum valuation for me to be comfortable plus an 80pct shareholder that wants to maximise their return and a regulator who seems comfortable with the companies plotting their own path for capital.

I want to buy more but I don't want to pay over $2.50. Put me in the optimist camp.
[E]xpedience does not license omnipotence.

Not Investment Advice. Do Your Own Research.

Ahab

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12424 on: May 17, 2019, 12:15:50 PM »
Here we go, after a long Trumpian speech he's got to talking about Fannie Mae....
Long: FNMAT, FNMAN, FMCCL, FMCKO, BAC, JPM, GOOG, JD, MO/PM
Short: PCG, TSLA
Twitter: AhabValue

SnarkyPuppy

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12425 on: May 17, 2019, 12:20:38 PM »
Trump spoke maybe a minute on housing finance reform but didn't say anything new.  He did emphasize "working on congress to pass things" but next sentence said "do administratively what we need to do to modernize our housing program and get rid of ridiculous regulations".

And then talked about how reforms will include less paperwork so we can build our houses with better lumber.  So I guess that was new.

allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12426 on: May 17, 2019, 12:21:10 PM »
He also mentioned working with wall street on this because they are very smart people.

Trump spoke maybe a minute on housing finance reform but didn't say anything new.  He did emphasize "working on congress to pass things" but next sentence said "do administratively what we need to do to modernize our housing program and get rid of ridiculous regulations".

And then talked about how reforms will include less paperwork so we can build our houses with better lumber.  So I guess that was new.

DocSnowball

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12427 on: May 17, 2019, 12:26:53 PM »
from Glen:
Judge Lamberth entered an order today denying FHFA, Fannie and Freddie’s request that he reconsider his not decision that preserved shareholders’ contractual claims.  Judge Lamberth declined FHFA and the GSEs’ invitation.  Accordingly, shareholders’ implied covenant breach claims will not be dismissed and will proceed to trial.  A copy of Judge Lamber’s decision is attached to this e-mail message.

Court doc attached...

Love it (as a non-legal layperson)...the ruling states on page 3 that implied covenant requires a party (FHFA here) "to refrain from arbitrary and unreasonable conduct which has the effect of preventing the other party (shareholders here) to the contract from receiving the fruits of the bargain".

I hope this ruling helps shareholders when FHFA and Treasury renegotiate terms later this fall re: the Fruits (dividend and liquidation value of preferred shares). This may be just as important as the restitution claims the trial will bring. For the lawsuits "to go away" as Calabria and Treasury desire (rather than continue and even increase), fair treatment is now a greater expectation based on this ruling. 

Ahab

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12428 on: May 17, 2019, 12:27:37 PM »
"My administration is committed to reforming our housing finance system...so important."
"we have many geniuses looking at it...and we'll figure something out..."
"someone said: why are you using wall street?" "Cuz I want to get very smart people, people that do this."

Major points (nothing this board didn't already know):
No reform has happened yet 10 years after crisis, GSEs still dominate the market (more competition would be desirable), taxpayers still on the hook (urgent problem in a recession), Treasury and HUD should develop a framework for a modern housing financing system, work with congress and also pursue administrative solutions to help the US housing system.
Long: FNMAT, FNMAN, FMCCL, FMCKO, BAC, JPM, GOOG, JD, MO/PM
Short: PCG, TSLA
Twitter: AhabValue

SnarkyPuppy

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12429 on: May 17, 2019, 12:33:36 PM »
He also mentioned working with wall street on this because they are very smart people.

Trump spoke maybe a minute on housing finance reform but didn't say anything new.  He did emphasize "working on congress to pass things" but next sentence said "do administratively what we need to do to modernize our housing program and get rid of ridiculous regulations".

And then talked about how reforms will include less paperwork so we can build our houses with better lumber.  So I guess that was new.

That's true - but I took that as in the context of they hired wall st people (phillips) to come up with a plan.  But could be taken the other way as well - but not new info as we know through other quotes treasury has been working w bankers on recap.