Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 4363743 times)

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15830 on: July 28, 2020, 10:36:28 AM »
I dont understand Phillip's reasoning...says these rules usually take years...well, this proposed rule is a redo of a prior proposed rule from 2018, so this has already taken years.  I dont buy it

I agree. May 22, when the rule was released, to August 31, when the comment period is set to end, is over 90 days already. What good would an extra 30 to 60 days do? The rule isn't that complicated.

In order to get things done during lame duck the rule needs to be finalized in November. How much time will need to pass between the end of the comment period and finalization of the rule?


cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15831 on: July 28, 2020, 10:39:00 AM »
I dont understand Phillip's reasoning...says these rules usually take years...well, this proposed rule is a redo of a prior proposed rule from 2018, so this has already taken years.  I dont buy it

I agree. May 22, when the rule was released, to August 31, when the comment period is set to end, is over 90 days already. What good would an extra 30 to 60 days do? The rule isn't that complicated.

In order to get things done during lame duck the rule needs to be finalized in November. How much time will need to pass between the end of the comment period and finalization of the rule?

that is up to calabria.  if he wants to make changes, the sooner he starts working on them the better.  If he doesnt want to make changes, could be next day

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15832 on: July 30, 2020, 08:38:40 AM »
back of envelope time.  I dont do this often, but it makes sense to do this now.

for fnma, looks to me like fnma has a reasonably reliable net income run rate of $10B/yr.  can be higher if g fees go higher and market share does not shrink (much).   being generous, let's assign a 10X PE and come up with a $100B equity valuation.  I will lower this PE below, since it will need to be lowered in connection with offerings.

there are 1.158B shares of common stock outstanding. giving effect to treasury warrants, this equals 5.8B shares of common stock on a fully diluted basis.

there is $19.13B of junior pref outstanding (par amount).  lets assume no exchange but par value for junior pref

so, assuming no exchange offer, $100B minus $19.13B = $80.87B divided by 5.8B shares = $13.9/share

now assume that the bankers require a 6X PE to blow out $100B of common (I understand the capital rule may require more, but let's assume this is the dilution target for this calculation).  reduces equity valuation to $60B, minus junior pref of $19.13B = $40.9B.

$7/share common valuation, pre-offering.  now, in this interest rate environment, $100B of cash proceeds does not increase substantially net income, as you would only replace debt expense at .20% or $200MM.  so ignore incremental income from use of proceeds.

now, how many more common shares (assume no pref shares issued, which is unlikely but helps simplify) do the bankers need to sell in order to raise $100B?  short answer? I don't know.  But back of envelope-wise, let's assume another number of shares equal to 5.8B shares multiplied by a factor of 2.44 (which is $100B raise divided by existing $40.9B common valuation)...which = 14.18B number of shares to be raised, + 5.8B commons shares outstanding pre-offerings = 20B common shares outstanding post offerings.  $40.9B divided by 20B common shares = $2.04/common share...and common is trading right there now.

edited to correct # of shares outstanding after offerings.

edit:  now, if the above is anywhere close, one might expect a re-rating back up to 10x PE once the capital raise is finished...in some four years...which would yield a $4/common share price.  what is the biggest variable to above?  introducing new preferred stock into the offerings.  given current rate environment, it will be a substantially more cost effective capital structure to issue as much new preferred stock as possible...reduce common shares outstanding substantially.  the bankers' impetus to do this may incentivize issuers to offer attractive exchange terms to existing junior pref.

 
                        
« Last Edit: July 30, 2020, 09:20:21 AM by cherzeca »

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15833 on: July 30, 2020, 09:42:16 AM »
back of envelope time.  I dont do this often, but it makes sense to do this now.

for fnma, looks to me like fnma has a reasonably reliable net income run rate of $10B/yr.  can be higher if g fees go higher and market share does not shrink (much).   being generous, let's assign a 10X PE and come up with a $100B equity valuation.  I will lower this PE below, since it will need to be lowered in connection with offerings.

there are 1.158B shares of common stock outstanding. giving effect to treasury warrants, this equals 5.8B shares of common stock on a fully diluted basis.

there is $19.13B of junior pref outstanding (par amount).  lets assume no exchange but par value for junior pref

so, assuming no exchange offer, $100B minus $19.13B = $80.87B divided by 5.8B shares = $13.9/share

now assume that the bankers require a 6X PE to blow out $100B of common (I understand the capital rule may require more, but let's assume this is the dilution target for this calculation).  reduces equity valuation to $60B, minus junior pref of $19.13B = $40.9B.

$7/share common valuation, pre-offering.  now, in this interest rate environment, $100B of cash proceeds does not increase substantially net income, as you would only replace debt expense at .20% or $200MM.  so ignore incremental income from use of proceeds.

now, how many more common shares (assume no pref shares issued, which is unlikely but helps simplify) do the bankers need to sell in order to raise $100B?  short answer? I don't know.  But back of envelope-wise, let's assume another number of shares equal to 5.8B shares multiplied by a factor of 2.44 (which is $100B raise divided by existing $40.9B common valuation)...which = 14.18B number of shares to be raised, + 5.8B commons shares outstanding pre-offerings = 20B common shares outstanding post offerings.  $40.9B divided by 20B common shares = $2.04/common share...and common is trading right there now.

edited to correct # of shares outstanding after offerings.

edit:  now, if the above is anywhere close, one might expect a re-rating back up to 10x PE once the capital raise is finished...in some four years...which would yield a $4/common share price.  what is the biggest variable to above?  introducing new preferred stock into the offerings.  given current rate environment, it will be a substantially more cost effective capital structure to issue as much new preferred stock as possible...reduce common shares outstanding substantially.  the bankers' impetus to do this may incentivize issuers to offer attractive exchange terms to existing junior pref.

 

My assumption is that they raise as much low cost preferred as they can which I would expect to be at least the same amount as they currently have. They obviously have the ability to 'carry' that amount.
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orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15834 on: July 30, 2020, 10:43:07 AM »
back of envelope time.  I dont do this often, but it makes sense to do this now.

for fnma, looks to me like fnma has a reasonably reliable net income run rate of $10B/yr.  can be higher if g fees go higher and market share does not shrink (much).   being generous, let's assign a 10X PE and come up with a $100B equity valuation.  I will lower this PE below, since it will need to be lowered in connection with offerings.

there are 1.158B shares of common stock outstanding. giving effect to treasury warrants, this equals 5.8B shares of common stock on a fully diluted basis.

there is $19.13B of junior pref outstanding (par amount).  lets assume no exchange but par value for junior pref

so, assuming no exchange offer, $100B minus $19.13B = $80.87B divided by 5.8B shares = $13.9/share

now assume that the bankers require a 6X PE to blow out $100B of common (I understand the capital rule may require more, but let's assume this is the dilution target for this calculation).  reduces equity valuation to $60B, minus junior pref of $19.13B = $40.9B.

$7/share common valuation, pre-offering.  now, in this interest rate environment, $100B of cash proceeds does not increase substantially net income, as you would only replace debt expense at .20% or $200MM.  so ignore incremental income from use of proceeds.

now, how many more common shares (assume no pref shares issued, which is unlikely but helps simplify) do the bankers need to sell in order to raise $100B?  short answer? I don't know.  But back of envelope-wise, let's assume another number of shares equal to 5.8B shares multiplied by a factor of 2.44 (which is $100B raise divided by existing $40.9B common valuation)...which = 14.18B number of shares to be raised, + 5.8B commons shares outstanding pre-offerings = 20B common shares outstanding post offerings.  $40.9B divided by 20B common shares = $2.04/common share...and common is trading right there now.

edited to correct # of shares outstanding after offerings.

edit:  now, if the above is anywhere close, one might expect a re-rating back up to 10x PE once the capital raise is finished...in some four years...which would yield a $4/common share price.  what is the biggest variable to above?  introducing new preferred stock into the offerings.  given current rate environment, it will be a substantially more cost effective capital structure to issue as much new preferred stock as possible...reduce common shares outstanding substantially.  the bankers' impetus to do this may incentivize issuers to offer attractive exchange terms to existing junior pref.

 

My assumption is that they raise as much low cost preferred as they can which I would expect to be at least the same amount as they currently have. They obviously have the ability to 'carry' that amount.

If/when they do issue new preferred it will probably be mandatory convertible after a period of a couple years. This way you give the div that investors in this environment crave but also satisfy capital requirements as Calabria may deem convertible preferred as CET1. Either way the lb of flesh still gets pulled from the common shares.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15835 on: July 30, 2020, 01:25:09 PM »
issuing pref will definitely make sense and tend to increase common share price...but too many moving parts and variables to ballpark

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15836 on: July 30, 2020, 04:07:22 PM »
@cherzeca

I thought a market cap calculation excluded preferred shares. Doing so with your numbers changes $40.9B to $60B and the final share price to $3.88 at a 6 P/E and $6.47 at a 10 P/E.

However, I think there's a simpler version given your market cap and cap raise numbers. If the market thinks FnF's total common stake is worth $100B, and they are being asked to contribute $100B to buy common shares, they will demand 100% of the total commons. Maybe they will leave a token amount for existing shareholders, pennies per share max. This also leaves basically nothing for the warrants, and the juniors would refuse an exchange because they wouldn't get anywhere close to $19B in value.

The same happens if they only think the total common stake is worth $60B and they're asked to buy $60B worth of commons. In fact, due to the certainty equivalent ($60B in cash is worth more than 100% of companies perceived to be worth $60B), it might not be possible to do a capital raise as large as the common market cap estimate.

Either the raise needs to be smaller or the market has to place a higher value on the total common stake. My working estimate for FnF's combined market cap is $180-216B ($18B in annual earnings, P/E of 10-12). Fannie's assets and income are around 60% of FnF's combined, so that leads to a $108-127B market cap for Fannie.

Using $120B, there is enough room to raise $60B in commons (who will want a 2/3 stake or so; 1/2 is too little due to the certainty equivalent) and still have $40B of valuation to split among the warrants, converted juniors, and existing commons. Treasury's warrants (for FnF combined) are probably not worth close to the $60-80B that Craig Phillips said they internally value them at, though. Maybe half that.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15837 on: July 30, 2020, 07:47:29 PM »
"However, I think there's a simpler version given your market cap and cap raise numbers. If the market thinks FnF's total common stake is worth $100B, and they are being asked to contribute $100B to buy common shares, they will demand 100% of the total commons."

disagree.  if pre-offering the common equity is worth $100B, with each share worth $X per share, then to raise $100B the new investors dont need ALL of the common equity, just enough so that common per share is reduced to $X/Y....the pie remains stagnant (forgetting about the investment expense savings), but the slicing up of the pie changes, with existing shareholders losing proportionate share of equity and suffering in share price...and by my calculation, the market has already anticipated this happening (and of course the senior prefs being nuked)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15838 on: July 31, 2020, 07:18:19 AM »
"However, I think there's a simpler version given your market cap and cap raise numbers. If the market thinks FnF's total common stake is worth $100B, and they are being asked to contribute $100B to buy common shares, they will demand 100% of the total commons."

disagree.  if pre-offering the common equity is worth $100B, with each share worth $X per share, then to raise $100B the new investors dont need ALL of the common equity, just enough so that common per share is reduced to $X/Y....the pie remains stagnant (forgetting about the investment expense savings), but the slicing up of the pie changes, with existing shareholders losing proportionate share of equity and suffering in share price...and by my calculation, the market has already anticipated this happening (and of course the senior prefs being nuked)

the key here is to understand that the PE multiple will be re-rated down significantly to get the offering done.  if you nuke the senior prefs, is the common worth $2/share? no. but the market will expect offerings that will drive the price down to $2/share....in fact if there is a deal announced that kills senior prefs and common jumps to $7/ share then you will have a shorting opportunity imo

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15839 on: July 31, 2020, 09:54:46 AM »
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