Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 4171662 times)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #14980 on: March 28, 2020, 11:35:04 AM »
+1 midas


Luke 5:32

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"You are life, You are life, in You death has lost its sting.  I'm running to Your arms, I'm running to Your arms.  The riches of Your love will always be enough, nothing compares to Your embrace.  Light of the world, forever reign." Listen: https://www.youtube.com/watch?v=ADuWzd7x25c

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #14982 on: March 28, 2020, 12:05:01 PM »
Yes, an exchange (thanks cherzeca, I will start using that term instead of conversion) is core capital neutral. Core capital = non-cumulative preferred stock par value + common stock par value + additional paid-in capital + retained earnings, by statute. The exchange just moves the $33B of junior pref par value from the first category to the third because common stock par value is zero for FnF.

As for how FnF's capital stands now, core capital, the only one that matters for us imo, was -$170B at the end of 2019. Cancelling or converting the seniors to common adds $193B; the amount on the senior pref line on the balance sheet (doesn't count towards core capital) would move to retained earnings (does count). This gives the $23B total equity you see on the balance sheets. That still leaves us around $100B short of what I expect Calabria to require (the midpoint of Watt's two alternatives of $103.5B and $139.5B).

There are still plenty of reasons for exchanging the prefs for commons:
1) It removes $33B of liquidation preference and $2B of dividend preference from in front of the re-IPO commons. That is a huge, huge deal imo. If I were a big-money investor interested in participating in the re-IPO, I would insist on this, and I wouldn't care about the exchange ratio because it wouldn't affect me. It is also $33B cheaper than redeeming the prefs (which accomplishes the same goal).
2) It allows FnF to tailor the weight preferred shares have in the post-release capital structure. $33B might already be too much for Calabria's liking, and given the rather high dividend rates on many series, it would make sense to convert at least those. Perhaps it would leave the really low-div series in place, though.
3) In times of stress FnF might need to raise additional capital. It will be much easier to do this with prefs than commons (using commons means open-ended dilution fears forever), so having fewer prefs in the capital structure to begin with makes this more feasible. This is also why I think the equity raise will be either all or mostly commons.
4) It's a way to placate junior pref plaintiffs in the lawsuits.
5) Both Calabria and Sheila Bair, albeit several years ago, defined a financial institution's safety and soundness in terms of its common equity. While an exchange is neutral from the perspective of statutory core capital, it does add $33B to common equity.

https://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf
Page 44: "the safety and soundness of institutions, which is defined as common equity"

Bair's comments about common equity were about banks and Basel III, not FnF, but she has long been outspoken about wanting big banks to specifically have lots of common equity. Calabria choosing her as one of the directors was very telling to me. The directors will be in charge of the capital restoration plans, and if Bair holds true to form, she will both recommend a junior for common exchange and an equity raise involving all or mostly common shares.

Thanks,  Do you have an opinion on whether or not the current environment changes for better or worse the expected path out of conservatorship? and if what Pagliara is suggesting could happen or likely? It sounds like all we need is a PSPA amendment this summer right?

investorG

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #14983 on: March 28, 2020, 03:16:55 PM »
Yes, an exchange (thanks cherzeca, I will start using that term instead of conversion) is core capital neutral. Core capital = non-cumulative preferred stock par value + common stock par value + additional paid-in capital + retained earnings, by statute. The exchange just moves the $33B of junior pref par value from the first category to the third because common stock par value is zero for FnF.

As for how FnF's capital stands now, core capital, the only one that matters for us imo, was -$170B at the end of 2019. Cancelling or converting the seniors to common adds $193B; the amount on the senior pref line on the balance sheet (doesn't count towards core capital) would move to retained earnings (does count). This gives the $23B total equity you see on the balance sheets. That still leaves us around $100B short of what I expect Calabria to require (the midpoint of Watt's two alternatives of $103.5B and $139.5B).

There are still plenty of reasons for exchanging the prefs for commons:
1) It removes $33B of liquidation preference and $2B of dividend preference from in front of the re-IPO commons. That is a huge, huge deal imo. If I were a big-money investor interested in participating in the re-IPO, I would insist on this, and I wouldn't care about the exchange ratio because it wouldn't affect me. It is also $33B cheaper than redeeming the prefs (which accomplishes the same goal).
2) It allows FnF to tailor the weight preferred shares have in the post-release capital structure. $33B might already be too much for Calabria's liking, and given the rather high dividend rates on many series, it would make sense to convert at least those. Perhaps it would leave the really low-div series in place, though.
3) In times of stress FnF might need to raise additional capital. It will be much easier to do this with prefs than commons (using commons means open-ended dilution fears forever), so having fewer prefs in the capital structure to begin with makes this more feasible. This is also why I think the equity raise will be either all or mostly commons.
4) It's a way to placate junior pref plaintiffs in the lawsuits.
5) Both Calabria and Sheila Bair, albeit several years ago, defined a financial institution's safety and soundness in terms of its common equity. While an exchange is neutral from the perspective of statutory core capital, it does add $33B to common equity.

https://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf
Page 44: "the safety and soundness of institutions, which is defined as common equity"

Bair's comments about common equity were about banks and Basel III, not FnF, but she has long been outspoken about wanting big banks to specifically have lots of common equity. Calabria choosing her as one of the directors was very telling to me. The directors will be in charge of the capital restoration plans, and if Bair holds true to form, she will both recommend a junior for common exchange and an equity raise involving all or mostly common shares.

This is great analysis, as usual.  but unless things get back to normal soon -- highly unlikely -- this analysis is likely not applicable for the current landscape with tens of millions of Americans losing their jobs.  I'd recommend our sponsors push for more workable immediate solutions that benefit all parties' current goals.   

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #14984 on: March 28, 2020, 03:59:00 PM »
"tens of millions of Americans losing their jobs"

this is the crux; will those jobs be there to return to in 4-8 weeks?  I have been looking at this crisis as a dramatic furlough of jobs, not as a dramatic destruction of jobs. the closest analogue is 9/11, but I dont recall the entire restaurant/hotel industries going dark back then.  the more dramatic the shutdown, the more immediate the return to business?  hard to say, but I would still think so
« Last Edit: March 29, 2020, 11:40:06 AM by cherzeca »

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #14985 on: March 30, 2020, 06:35:45 AM »
Whoa.

https://twitter.com/HoldenWalker99/status/1242978538992611330
#CARESAct: Lesson learned? Any warrants need to be exercised by January 1, 2021. Want to bet that $FNMA and $FMCC warrants are exercised by January 1, 2021, too?

Am I wrong thinking the following on this?  This is gold.  Any new warrants the gov't issues will be exercised in calendar year 2020, guaranteed.  This does not explicitly include GSE's, but it would be very, very odd for the gov't to make profits by exercising warrants in other companies and not the GSE's. Might as well exercise all warrants the gov't holds, make money for the taxpayers, and use that in the month or two leading up to the election to get re-elected.  Leads me to believe this is going to happen this year, and probably in the Summer at the latest.   See attached for screenshot from the CARESAct.
« Last Edit: March 30, 2020, 06:43:19 AM by Luke 5:32 »
"You are life, You are life, in You death has lost its sting.  I'm running to Your arms, I'm running to Your arms.  The riches of Your love will always be enough, nothing compares to Your embrace.  Light of the world, forever reign." Listen: https://www.youtube.com/watch?v=ADuWzd7x25c

investorG

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #14986 on: March 30, 2020, 06:58:18 AM »
Whoa.

https://twitter.com/HoldenWalker99/status/1242978538992611330
#CARESAct: Lesson learned? Any warrants need to be exercised by January 1, 2021. Want to bet that $FNMA and $FMCC warrants are exercised by January 1, 2021, too?

Am I wrong thinking the following on this?  This is gold.  Any new warrants the gov't issues will be exercised in calendar year 2020, guaranteed.  This does not explicitly include GSE's, but it would be very, very odd for the gov't to make profits by exercising warrants in other companies and not the GSE's. Might as well exercise all warrants the gov't holds, make money for the taxpayers, and use that in the month or two leading up to the election to get re-elected.  Leads me to believe this is going to happen this year, and probably in the Summer at the latest.   See attached for screenshot from the CARESAct.

read the few sentences prior to that reference in the bill. I believe it references allowing funds to be used in 2021+ to exercise options on warrant deals agreed to in 2020.  likely not applicable.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #14987 on: March 30, 2020, 07:04:10 AM »
Whoa.

https://twitter.com/HoldenWalker99/status/1242978538992611330
#CARESAct: Lesson learned? Any warrants need to be exercised by January 1, 2021. Want to bet that $FNMA and $FMCC warrants are exercised by January 1, 2021, too?

Am I wrong thinking the following on this?  This is gold.  Any new warrants the gov't issues will be exercised in calendar year 2020, guaranteed.  This does not explicitly include GSE's, but it would be very, very odd for the gov't to make profits by exercising warrants in other companies and not the GSE's. Might as well exercise all warrants the gov't holds, make money for the taxpayers, and use that in the month or two leading up to the election to get re-elected.  Leads me to believe this is going to happen this year, and probably in the Summer at the latest.   See attached for screenshot from the CARESAct.

this is a strange provision. as you know the value of a warrant lies in it optionality, being able to be a warrant and not a share for as long a period of time as possible. why should there be a rush to exercise, or if there is to be, why not just issue common shares?  as to read over to the GSEs,  I cant say you are wrong, but I also cant say that you are right.

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #14988 on: March 30, 2020, 07:22:14 AM »
read the few sentences prior to that reference in the bill. I believe it references allowing funds to be used in 2021+ to exercise options on warrant deals agreed to in 2020.  likely not applicable.

I didn't see that, thanks.  Admittedly I got the screenshot second-hand so I didn't have proper context.
"You are life, You are life, in You death has lost its sting.  I'm running to Your arms, I'm running to Your arms.  The riches of Your love will always be enough, nothing compares to Your embrace.  Light of the world, forever reign." Listen: https://www.youtube.com/watch?v=ADuWzd7x25c

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #14989 on: March 30, 2020, 07:55:11 AM »
Whoa.

https://twitter.com/HoldenWalker99/status/1242978538992611330
#CARESAct: Lesson learned? Any warrants need to be exercised by January 1, 2021. Want to bet that $FNMA and $FMCC warrants are exercised by January 1, 2021, too?

Am I wrong thinking the following on this?  This is gold.  Any new warrants the gov't issues will be exercised in calendar year 2020, guaranteed.  This does not explicitly include GSE's, but it would be very, very odd for the gov't to make profits by exercising warrants in other companies and not the GSE's. Might as well exercise all warrants the gov't holds, make money for the taxpayers, and use that in the month or two leading up to the election to get re-elected.  Leads me to believe this is going to happen this year, and probably in the Summer at the latest.   See attached for screenshot from the CARESAct.

As cherzeca said I dont  necessarily think your wrong or right but it does look a little hypocritical to afford another bailed out entity quick resolution with the warrants while the GSEs fester. As I believe mnuchin has said before the Govt made significant investment in the GSEs and continues to backstop them effectively. As much as I dont like it I wonder if GSEs would be thrown into a "this is different" category.

The bailouts are of different vintages. Anger and hate of the 2008 bank/GSE bailouts and this one which was induced by a mandated shutdown. Technically the investment activities are identical but the flavor is different. In the end though if rule of law and property rights are to be respected then hopefully exercise timing is similar.

Hopefully in the end as you mention just another reason why this can/will happen in the back half of the year.