Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 3558656 times)

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12380 on: May 15, 2019, 01:27:37 PM »
you can go around and around on common valuation and not know where you end up until you see some kind of deal structure announced...and then it might still change once that deal goes to market.  the interesting thing is that treasury has such a good deal, 80% free warrants, that you would think it would give some up in order to ensure deal execution.  may be wishful thinking  though

Agree. One thing I would say though is that it'll probably work out somewhere between the optimistic and pessimistic valuation.
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orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12381 on: May 15, 2019, 01:53:09 PM »
Anybody else nervous about all this talking by Calabria?

Sherrod Brown's favoring a status quo could mean anything from liking the current conservatorship scheme (nationalization) to simply keeping Fannie and Freddie *as is*. While it is highly unlikely Congress may succeed at tying FHFA/Tsy's hands even if they try, it is not inconceivable that they may take a shot at it. The more Calabria talks...

We need a material move, less explaining.

Im just concerned I don't have enough preferred and raising more cash to buy more.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12382 on: May 15, 2019, 02:07:41 PM »
Also, assuming the government exercise the warrants they're then incentived to limit dilution to maximise their gains.

I would be very careful here. Treasury didn't always act in such a way as to maximize the value of its common shares with regards to the other bailout recipients. Also, they could sell the warrants back to FnF for a set amount of money, removing Treasury's incentive to prop up the share price.

There's also the matter that the investors that will recap FnF have a powerful incentive to drive the share price down as far as possible, and Treasury can't afford to just tell them no.

I believe this is why the common price is staying mostly flat, even with all this good news. It will be very sensitive to small changes in the mechanics of the recap.

If Fannie has a market cap of 165b and common is diluted 92% they're still worth $9.

If the company and Treasury are sensible with the capital raise then the company can push back to investors that actually they don't need to raise cash they could just earn their way out of it. I'd prefer that but I don't expect it as treasury will likely want it's cash asap.

It's possible to be too pessimistic is what I'm saying.

Dilution is more dependent on capital levels then just a straight market cap/share count calculation correct? a .5-1% change in capital levels can really swing valuation as Midas says, and looking at the most recent Calabria discussion he wants capital, and then more capital on top of that. Treasury is going to extract as much as they can, and I can see that as even though it would make perfect sense to stop the sweep ASAP they just keep taking Q after Q. If they are happy to sweep a measly 2-3B a Q they are going to extract as much flesh as they can unless someone(en banc) stops them.

Looking at the Tarp bailouts many times treasury changed agreements swapped share classes, sold warrants etc. Unfortunately I doubt it will be as clean as dealing with the Sr Prd and common gets 20% of whats left. I think prfd holders are going to argue if the common is worth anything the prfd is worth par.
« Last Edit: May 15, 2019, 04:45:08 PM by orthopa »

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12383 on: May 15, 2019, 02:46:09 PM »
Dilution is more dependent on capital levels then just a straight market cap/share count calculation correct? a .5-1% change in capital levels can really swing valuation as Midas says, and looking at the most recent Calabria discussion he wants capital, and then more capital on top of that. Treasury is going to extract as much as they can, and I can see that as even though it would make perfect sense to stop the sweep ASAP they just keep taking Q after Q. If they are happy to sweep a measly 2-3B a Q they are going to extract as much flesh as they can unless someone(en banc) stops them.

Looking at the Tarp bailouts many times treasury changed agreements swapped share classes, sold warrants etc. Unfortunately I doubt it will be as clean as dealing with the Sr Prd and common gets 80% of whats left. I think prfd holders are going to argue if the common is worth anything the prfd is worth par.

I agree fully.

I still maintain that if it looks like the commons will have a lot of value, the junior pref holders will push for a conversion, and neither FHFA nor Treasury has a reason to tell them no. The juniors have an embedded call option on the commons, which means that the commons cannot outperform.

That will only be true as of the conversion date, so I guess the commons could outperform between now and then, but I don't see a reason to believe that they will. It smacks of trying to time the market. If I did, I would sell some prefs to buy commons with the intention of switching back later.

I could always be wrong, of course, but this is the way I see it, and it's certainly the way I would act if I was one of the junior pref litigants.
« Last Edit: May 15, 2019, 02:47:40 PM by Midas79 »

rros

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12384 on: May 15, 2019, 04:00:24 PM »
Anybody else nervous about all this talking by Calabria?

Sherrod Brown's favoring a status quo could mean anything from liking the current conservatorship scheme (nationalization) to simply keeping Fannie and Freddie *as is*. While it is highly unlikely Congress may succeed at tying FHFA/Tsy's hands even if they try, it is not inconceivable that they may take a shot at it. The more Calabria talks...

We need a material move, less explaining.

At my new job, I was given the advice of building consensus and getting an idea approved BEFORE the formal meeting in which you seek it's approval and build the case for it.

Seems to me that's what's happening here. Informing the audience, building a consensus, and seeking approval BEFORE taking the official actions.

Certainly could be wrong, but I'm not concerned by the recent rise in optics on the situation.
Well... makes sense.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12385 on: May 15, 2019, 06:18:20 PM »
calabria seems to have toned down his "advice" for congress, going from saying competition is desirable to saying that the model he has is the model he's stuck with, and I cant help but think this is driven in part by sen brown saying he won't play ball with Crapo. if I am right, thank goodness.

while there is no way to anticipate the roadmap, it does seem likely that treasury will want the junior prefs to convert and, since treasury cant force conversion, one might think the juniors will be given an incentive to convert. if so there might be some upside for juniors beyond par.  if not then par "should" be a floor (although there may also be some hard-nosed negotiating to try to force a discount...but to do this, someone (ie treasury) arguably would need to buy up 60% of a class of juniors to try to modify that class, and I just don't see treasury or anyone else committing capital to do that).  so hard to critique being in the juniors.

SnarkyPuppy

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12386 on: May 15, 2019, 06:39:14 PM »
TwoCitiesCapital hit the nail on the head.

Also keep in mind - Calabria is one side of the equation - and he is the regulator.  He's shoving the idea of capital down the throats of anti-gse crowd/congress because it's difficult to defend against.  I think he provides a subtle hint in mentioning that he will have to sit down and meet in the middle with Treasury in negotiations, as Treasury (80% common holder) wants to maximize its investment.   

My speculation is Calabria is acting as a safety/soundness regulator asking for as much capital as possible - and will be "disappointed" when he has to lower his capital standards to execute a recap given negotiations with Treasury. 


SnarkyPuppy

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12387 on: May 16, 2019, 05:19:10 AM »
Can someone articulate a practical bear case for the preferreds which would result in permanent loss of capital?

I agree there are situations where the returns aren't significant (large haircut to par if we lose 5th circuit en banc, recap primarily through long term retention of earnings)

allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12388 on: May 16, 2019, 05:45:12 AM »
I never understood the argument that if shareholders lose Collins, pfd shareholders would have to take a haircut. As much as pfd shareholders need the government to signoff on this, the government needs them more. Is the us government really going to hold up the biggest ipo of the decade which is in their best interests (monetize ~$100b + get taxpayers off the hook) for an extra ~$5b of value that they may be able to extract from shareholders (whom are going to be the participants of the new recap...)? Never made sense to me. Pfds are a small piece of the pie, but unless treated fairly, the admin plan goes nowhere without pfd shareholders signing off on it. That's a position of power if you ask me!

More likely result of losing the Collins case is potentially the GSEs not getting the ~$20b+ of tax credits for the overpayments that plaintiffs are asking for in remedy in addition to writing down the senior pfds.


Can someone articulate a practical bear case for the preferreds which would result in permanent loss of capital?

I agree there are situations where the returns aren't significant (large haircut to par if we lose 5th circuit en banc, recap primarily through long term retention of earnings)

allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12389 on: May 16, 2019, 06:00:13 AM »
Treasury beginning to line up w/ Calabria.

@KatyODonnell_
Craig Phillips, Treasury counselor, on GSEs this morning: “The current state is the worst possible state. We can preserve the system and reform it – we want to get Fannie and Freddie out of conservatorship, and we want to use private capital to do that.”

*PHILLIPS: WE WANT TO GET FANNIE-FREDDIE OUT OF CONSERVATORSHIP
*PHILLIPS: WE'VE HAD WORKING SESSIONS ON RECAPITALIZING GSES
*PHILLIPS: CALABRIA'S PLAN FOR GSES FOOTPRINT HAS BEEN DISCUSSED
*TREASURY'S CRAIG PHILLIPS SAYS COMPETITION WOULD BE GOOD