Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 4175537 times)

Midas79

  • Hero Member
  • *****
  • Posts: 633
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15550 on: May 24, 2020, 03:38:52 PM »
Thoughts of the board on a couple of things, please. Wisdom of crowds and all that...

  • As a Percentage, how much of the business do you expect new common to end up owning? 25%, 40%, 50%?
  • As a Percentage, how much of the business do you expect existing Junior Preferred to end up owning? 25%, 40%, 50%?
  • At what price will the Junior Preferred convert to Common and will it be the same as the SPO offering price?

1) 50% at an absolute minimum imo. They are providing nearly all the capital, why would they take less than a controlling interest? This number could go as high as 80%.
More precisely, this is a function of how much capital FnF are trying to raise and the market's estimate of their future market cap. $100B of capital raised for $250B of market cap is a floor of 40%, and due to the certainty equivalent, $100B of cash is worth more than 40% companies that might be worth $250B, so I would expect the investors to demand at least 50% of the equity in case earnings drop in the future, etc.
2) Roughly half of what the new commons don't own. Using 50% for the new commons, that would leave 25% for converted juniors, 20% for Treasury's warrants, and 5% for the existing commons.
The juniors' collective $33B in capitalization doesn't count towards CET1 capital, and the full CET1 capital standard is $175B (wow!). A conversion to commons adds $33B to CET1, so FHFA has every reason to offer a conversion. Also, the re-IPO investors have every reason to insist on the existing juniors being converted because it is a costless way to remove $33B of liquidation and $2B of dividend preference from in front of the re-IPO commons.
3) The re-IPO price is a function of the answer to #1-2 and an estimate of FnF's market cap. I don't think the conversion will happen at the re-IPO price because I think it will happen prior to the re-IPO. It might be based on the trailing one-month market price (as with Citi), but instead it could very well be reverse engineered to whatever the juniors are willing to accept. All I know is that the market didn't anticipate how generous Citi's pref-to-common conversion would be, and I think the same thing is happening now.

Using the 50% new common, 25% converted juniors, 20% warrants, 5% existing commons example, we can get a final share count. The existing commons are 1.8B shares, so there would be 36B fully diluted shares: divide 1.8B by 0.05. If this seems absurdly high, apply a 1:10 reverse split to bring the number down to a reasonable level. Assuming a $250B market cap, that's a per-share price of $6.94.

If the new commons won't invest for less than 75% of the companies, that would leave 12.5% for the converted juniors, 10% for the warrants, and 2.5% for the existing commons. That doubles the share count, which halves the share price above to $3.47.

The juniors are money good in any case. The commons are worth something on the order of $5 in the end, which comports with other estimates I have made and seen (like Nomura).

Edit: Note that 12.5% of $250B is $31.25B, which is less than the total par value of the juniors. Below that percentage of the total equity, it's highly unlikely that the juniors accept a conversion at all. That, then, puts the re-IPO in danger. In fact, if investors (including current junior pref holders) only perceive the market cap to be $200B, the juniors wouldn't take less than 1/6 (16.7%) of the total equity in a conversion.

The first scenario I laid out gives the prefs $62.5B of value in the end, or almost 200% of par. Perhaps that's unrealistic, though obviously the junior pref holders would take it. It would be 150% of par if the market cap is $200B instead. The second scenario involves a slight to moderate haircut (to the total par value) for the prefs.
« Last Edit: May 24, 2020, 04:32:26 PM by Midas79 »


DRValue

  • Sr. Member
  • ****
  • Posts: 477
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15551 on: May 25, 2020, 02:23:22 AM »
Thanks Midas.
I would imagine the juniors would insist on a good deal relative to new common as they wouldn't want to convert and then be diluted. A sufficient discount to common price on conversion would help.
[E]xpedience does not license omnipotence.

Not Investment Advice. Do Your Own Research.

investorG

  • Hero Member
  • *****
  • Posts: 851
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15552 on: May 26, 2020, 05:58:06 AM »
Wow, Calabria managed to upset even bank-centric Don Layton with the magnitude of his disastrous excessive capital requirements.

Meanwhile, mortgage credit has tightened -- hurting Trump's re-election chances and likely his own job in 8 months.

Smart guy, but he's screwing American citizens.  Capital of many multiples of the stress losses = higher mortgage rates and fatter bank profits. 

cherzeca

  • Hero Member
  • *****
  • Posts: 3172
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15553 on: May 26, 2020, 08:24:44 AM »
it is one thing for Layton to write a blog piece, and quite another to say the same thing in a public proposed rule comment.  my bet is that he putzes out

Covid-19_Survivor

  • Jr. Member
  • **
  • Posts: 83
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15554 on: May 26, 2020, 07:34:23 PM »
Wow, Calabria managed to upset even bank-centric Don Layton with the magnitude of his disastrous excessive capital requirements.

Meanwhile, mortgage credit has tightened -- hurting Trump's re-election chances and likely his own job in 8 months.

Smart guy, but he's screwing American citizens.  Capital of many multiples of the stress losses = higher mortgage rates and fatter bank profits.

Dude, read the tea leaves. the numbers demanded mean one thing, and one thing only: The explicit guarantee is done with (and maybe that's why everything has been delayed, delayed, delayed. The principles involved realized that Congress was not going to bite on backstop so... new plan). I for one will gladly take a hit on ownership (~150 bil of new money) if it also means govt doesn't have us by the cajoles anymore, or at least would treat us like a tbtf bank.

I'm not sure how the market reacts once this becomes known but I'll stick around. I like it.

Luke 5:32

  • Hero Member
  • *****
  • Posts: 2844
"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

Cox022

  • Newbie
  • *
  • Posts: 46
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15556 on: May 27, 2020, 06:56:44 AM »
Jamie Dimon yesterday on forbearance:

      ○ 1/3 of people who ask for it, never actually use it
      ○ I suspect a lot of people who did use it are doing so as a safety precaution
      ○ My hope would be, as we see first people coming off forbearance, that the people who start repaying is higher than people think, not lower
          This by the way gives them a chance to do a re-fi, which could be really smart for them in certain cases
      ○ We will start to see the first cohort of people coming off of forbearance in June
      ○ In the old days, it was a danger that once you stopped paying your mortgage, you never started again
          But remember last time around, home prices were down 40%, there was a good reason not to pay, you weren't going to lose any equity value in your home, whereas today, its the opposite,
                           there are very few people underwater in their homes today

investorG

  • Hero Member
  • *****
  • Posts: 851
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15557 on: May 27, 2020, 07:59:18 AM »
Howard's latest...
https://howardonmortgagefinance.com/2020/05/27/now-we-know/

Calabria is a hero to his think tank buddies.  Meanwhile middle class Americans must send more of their wages to mortgages (or apt landlords if they are shut out).    The arbitrary and excessive buffer amount will likely turn into a political football with changes coming under every administration (assuming Seila's outcome is as expected).  I can guess who Mr. Tim Howard is rooting for in 5 months.

cherzeca

  • Hero Member
  • *****
  • Posts: 3172
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15558 on: May 27, 2020, 08:38:18 AM »
I thought this was a very good comment on the proposed capital rule:  https://www.fhfa.gov//SupervisionRegulation/Rules/Pages/Comment-Detail.aspx?CommentId=15531

cherzeca

  • Hero Member
  • *****
  • Posts: 3172
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15559 on: May 27, 2020, 08:39:50 AM »
Howard's latest...
https://howardonmortgagefinance.com/2020/05/27/now-we-know/

Calabria is a hero to his think tank buddies.  Meanwhile middle class Americans must send more of their wages to mortgages (or apt landlords if they are shut out).    The arbitrary and excessive buffer amount will likely turn into a political football with changes coming under every administration (assuming Seila's outcome is as expected).  I can guess who Mr. Tim Howard is rooting for in 5 months.

while my preference is for the trump administration to carry through on its "plan" for the next 4 years, I am beginning to see the silver lining of a Biden administration.