Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 3323198 times)

james22

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12460 on: May 17, 2019, 02:28:44 PM »
>50% of my portfolio... All pfds...

About 60% of my portfolio.

All my common exposure is hedged with prefs...

Thanks.

I made the commons a 3% position today and I'll make the preferreds 5% Monday.
25% BRK l 25% BAM l 8% SV (VSIAX) l 8% EM (VEMAX) l 4% FNMA/FMCC l 4% FNMAS/FMCKJ l 25% Stable Value


allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12461 on: May 17, 2019, 02:35:14 PM »
Ackmans original $40pt assumed that the government would simply do the right thing and forfeit their 80% warrants. No chance.

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12462 on: May 17, 2019, 02:40:04 PM »
Ackmans original $40pt assumed that the government would simply do the right thing and forfeit their 80% warrants. No chance.

I don't think so as he projected the warrant valuation as an incentive for treasury to allow his recap. Would need to see his share counts too as a bit fuzzy on that.

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Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12463 on: May 17, 2019, 03:40:59 PM »
But valuations vary. Ackman had them up to 40 doesn't he? My valuation would say he's wildly over pricing them.

Ackman had $23-47 including the warrants being exercised, but he valued the warrants at or above $300B. I think $50-60B is a more reasonable number (Moelis says $100-125B, but I think they're being too optimistic), so scaling down appropriately gives $4-9 which is right around my target range, though that's mostly coincidence.

Thinking about the investors demanding 2/3 stake. If Fannie retains 33b over 3 years,  gets 20b from treasury and capital required is 87b why should they get 2/3s of earnings if they provide 40pct of the capital (34b)?

I don't think Fannie will get anywhere close to 3 years to retain capital. Four quarters max, and most likely less. Also, the extra money from Treasury won't be returned to Fannie if the Collins plaintiffs get what they want, but instead Fannie gets a tax credit (the $20B is also FnF combined, so Fannie itself would get less). I don't know if the tax credit count towards core capital, so I am not including it for now.

The reason that the new investors will insist on more equity than their capital contribution is the certainty equivalent. $60B in cash, for example, is worth much more than 50% of the equity in a company that is worth roughly $120B. 40% of the capital could easily demand 2/3 of the equity if not more. Also, these new investors will want the lowest share price possible to maximize their ROI, and they cannot afford to be pushed away lest the entire recap fail. Again, every dollar the existing common shareholders get is one fewer dollar for these new investors. They will fight tooth and nail.

I see the pref conversion differently. I don't see how pref conversion failing impacts a common raise

The capital structure can't tilt too heavily towards prefs because it chews up income attributable to the commons (leading to a lower offering price too). There's also a 2016 line by Calabria saying that he thinks FnF's capital should mostly be common equity. Converting existing prefs allows new ones to be issued in whatever amount FnF deem appropriate, and more importantly this doesn't cost FnF a dime. I think a conversion is highly likely and will be part of settling the court cases. Since the plaintiffs are mostly pref holders I expect the ratio to be generous, and certainly better than what Moelis projects.

Can we agree the common value will be somewhere between 0.75 and 19 a share? 😀 :)

Of course! Please don't take my posts personally, I am just stating my case. It is quite possible that I am too ossified in my thinking. If anyone wants to chime in they are more than welcome.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12464 on: May 17, 2019, 04:18:18 PM »
@Midas79

Moelis use a price / earnings multiple where I discount the earnings so slightly different. My earnings are the average of moelis projections and actuals combined growing at roe rate * by retained earnings (70pct) at 80pct confidence.

That does produce a higher p/e technically if you want to divide the market cap by the share count, yes.

But valuations vary. Ackman had them up to 40 doesn't he? My valuation would say he's wildly over pricing them.

Thinking about the investors demanding 2/3 stake. If Fannie retains 33b over 3 years,  gets 20b from treasury and capital required is 87b why should they get 2/3s of earnings if they provide 40pct of the capital (34b)?

I see the pref conversion differently. I don't see how pref conversion failing impacts a common raise

Can we agree the common value will be somewhere between 0.75 and 19 a share? 😀 :)

Just to throw my $.02 in so we can all hash this out....

I think what gives a prfd investor a little solace is a bunch of things.

1. The par value is a bench mark and a contract. Once the conservatorship is over /NWS done those contracts should be valid again. 

2. If/When Sr. Prfd are considered paid Jr prfd go to top of the food chain and into top bargaining position. Everyone knows a bunch of money needs to be raised and someone is going to lose more then the other.  Why would prfd holders agree to a deal that includes returns that supersede their own? They have a negotiable bench mark and all common holders should know that bench mark.

3. To piggy back on 2 if prfd is converted they will convert in a ratio favorable to them. Otherwise why convert? If you getting the better deal in 2. why convert back and lose? They will only convert on favorable terms thus midas's call option. Again your second fiddle.

4. 2. and 3. above show that common is not only at the mercy of treasury's stake but the prfd holders projected return.

5. If your able to mentally get around the above you have an unknown dilution % coming that is >80%, is associated with likely billions of shares of similar class stock forming a supply overhang and at this point unable to really provide any predictive valuation metrics. What the in the hell multiple do you choose?

6. Even in the aftermath of FnF getting back to business as usual earnings have been a little erratic. How will the market reward/punish that?

7. Common doesn't have a seat at the table. Jr Prfd, Treasury and new money do. People would argue they should and at second glance they do, the 80% owner that would sell their soul to the devil to get out as quick as possible and for the most profit for them and "tax payer"

8. Many have argued why would new $$ come in if they were going to be diluted? They wont, they will come in after the initial dilution as subsequent dilution. Because again. Why would they come in if they knew they were going to be diluted?

9. The only thing I have'nt completely rationalized is the exact mechanism treasury goes about this without dragging out their profit for years. Again looking at the previous TARP deals they swapped classes of stock, sold warrants, etc. They could create a new class of stock in exchange for the warrants senior to the legacy common that converts to dilute the common on a ratio basis that they could sell to new money that dilutes old shareholders but not new. These wall street guys are smart fuckers. And what can the common do? Your money is paid in already. They dont need your money. They need the NEW money.

My diatribe is not meant to dissuade your position but to rationalize out loud why I only hold prfd for the sake of arguement.

allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12465 on: May 17, 2019, 04:30:16 PM »
That's amazing i always assumed Ackman had $40pt bc of zero warrant excercise. $300b in value for government, he really is in lala land!  Even at $150b warrant value which is what he claims today thats $20/shr per his valuation.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12466 on: May 17, 2019, 07:44:40 PM »
Phillips sounded very coherent, smart and reasonable.  I love that he made the 10%(11.5%) moment point on his own

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12467 on: May 18, 2019, 12:23:40 AM »
@Midas79

Nothing personal I know 😀. Its good to hear opposing views and get a little bit of balance.

I did think last night about the pref conversion impacting income to common and you make a good point. There's no doubt it would impact income projections and share count but I'm not sure it's a show stopper.

@orthopa

You're rationale for owning prefs is very similar to my own and why I bought them originally years ago. The contract and known value are key. I do see the business as having some duty to common in a capital raise as that is who they are working for. To me it's not like these are start-ups losing money and they're going begging. Fannie will likely have 23b in capital imo and be earning 11b a year. If the companies push the timeline back for capital the more strength they have negotiating with new money. They can get this done without a capital raise if they had to, but the regulator would need to agree the timeline. A pref conversion would be beneficial to income as well.

Hopefully I'm right but if only half right ($9) I'll still be celebrating.

GLTA (especially me 😁)
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orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12468 on: May 18, 2019, 10:23:38 AM »
http://wallstreetonparade.com/2012/08/the-untold-story-of-the-bailout-of-citigroup/

Interesting read on the govts various TARP investments in Citi.

Some snippets.

"The government was going to guarantee a toxic asset pool at Citigroup up to $306 billion (later reduced to $301 billion). As a fee for this arrangement, Citigroup would give the government $7.059 billion in perpetual preferred shares, paying 8 percent annual dividends. And where would an insolvent bank get the funds to pay an 8 percent dividend; from another injection of $20 billion in cash from the government. The Fed also agreed to backstop residual risk in the asset pool through a non-recourse loan if necessary.

The Treasury was also to receive warrants to purchase 66,531,728 shares of common stock at a price of $10.61 per share. (Adjusting for the company’s 1 for 10 reverse stock split, Citigroup closed yesterday at $2.89 – a far distance from a warrant exercise price of $10.61.) "




"The Treasury and the Fed knew exactly whose interests they were protecting.  Just 11 months earlier, Citigroup had publicized a capital raising of $12.5 billion in convertible preferred stock in a private placement – meaning the full details were not released to the public.  The press release said the investors included Saudi Prince Alwaleed bin Talal and Sandy Weill and the Weill Family Foundation.

Following press articles that ran the details in February of 2009, on June 9, 2009, the U.S. Treasury agreed to swap its $25 billion of preferred stock for 7.7 billion shares of common.

Common stock ranks at the very bottom of the chain in terms of claims on the assets of a failed institution.  The government effectively put the taxpayer behind Citigroup’s creditors, bondholders, and its preferred stockholders. It gave up the taxpayers’ place in line as a preferred stock holder and sent the taxpayer to the back of the line. And, it gave up the 8 percent fixed income stream on the preferred. "



"But the plan to bail out the Saudi Prince, Sandy Weill and a select group of “private investors” is cryptically contained in this proxy statement dated June 18, 2009.

The private investors, who made their purchases on or around January 15, 2008 were going to be made whole on their $12.5 billion investment on or around March 18, 2009, despite the fact that Citigroup’s stock had fallen by 88 percent in that period of time. (Their preferred stock was convertible into common.)

I’ve been reading proxy statement for over 30 years.  I have never read a more convoluted, tangled web of unnecessary complexity to arrive at the clear destination: private wealthy individuals were being made whole.

Now I can guess the argument that the Treasury and the Fed would make.  Citigroup could no longer afford to pay either the government or the private investors the high fixed rate of interest on the preferred stock.  To induce these investors to convert to common, they needed an incentive – like being made whole. My argument would be that they would have been wiped out already in November of 2008 if the U.S. government had negotiated properly.

 
Certainly not apples to apples but has the tone of what I believe will happen.

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12469 on: May 18, 2019, 11:16:08 AM »
Yup there's risk alright. 😀
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