Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 3731024 times)

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12750 on: June 19, 2019, 09:16:25 AM »
the pivot point in this capital raise will be what capital level will fhfa set.  a high level means that investors will want a low re-IPO price, meaning treasury proceeds go down.  fhfa has no skin in the game, whereas treasury has all of the skin the game.

Watch out for the possibility of Treasury selling the warrants back to FnF for a fixed amount, then. If that happens then their incentive to push for lower capital levels, and thus a higher share price, disappears.

Conservator would never allow it and the business would never do it if  it leads to more dilution than the treasury retaining the warrants and selling in the market.
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Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12751 on: June 19, 2019, 09:46:33 AM »
@Midas, this is an interesting thought and would make it much easier for Treasury to quickly "get out" of its position. The one pushback I would have is how would FnF buyback the warrant position pre cap raise? I would think, this would only be able to take place after FnF had been fully recapped and then + some, which would have to be many years down the road. As @chereza mentions, would still require lower capital levels for Treasury to realize max value, otherwise, once we got to that point, the warrants would have a lower value.

FnF wouldn't buy them back before the raise, they would do it in conjunction with it. Instead of raising, say, $60B in commons with an implied warrant value of $40B, they raise $100B and give $40B of it to Treasury in exchange for the warrants.

This gives Treasury some certainty over what they would get and also gets them their money right now, allowing them to "get out" quickly as you say.

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12752 on: June 19, 2019, 10:25:41 AM »
Conservator would never allow it and the business would never do it if  it leads to more dilution than the treasury retaining the warrants and selling in the market.

Why would FHFA care? And what do you mean by "the business would never do it"? More dilution equals more money for the new investors, not less.

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12753 on: June 19, 2019, 10:40:55 AM »
Conservator would never allow it and the business would never do it if  it leads to more dilution than the treasury retaining the warrants and selling in the market.

Why would FHFA care? And what do you mean by "the business would never do it"? More dilution equals more money for the new investors, not less.

Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.
[E]xpedience does not license omnipotence.

Not Investment Advice. Do Your Own Research.

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12754 on: June 19, 2019, 11:14:19 AM »
Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway.

Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in.

This is one downside scenario for the commons, especially compared to the juniors.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12755 on: June 19, 2019, 11:15:27 AM »
if treasury sells its exercised warrants in the market, this is capital neutral.  if it redeems the warrants, this is capital negative.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12756 on: June 19, 2019, 11:35:05 AM »
Conservator would never allow it and the business would never do it if  it leads to more dilution than the treasury retaining the warrants and selling in the market.

Why would FHFA care? And what do you mean by "the business would never do it"? More dilution equals more money for the new investors, not less.

Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

I think the one thing the common holders forget or get mixed up is the thought that treasury will push for a high share price but forget about how that essentially dilutes the new money.  A share price higher then 3 and change would be good for common holders but treasury owns 80% of the business for nothing. They paid .00000001 for their 80% and can exercise whenever and however much they want. Also how much more did get they get in the sweep as a profit? Is anyone counting that towards what the treasury would count? What if the treasury counts this as profit in addition and is willing to take less to raise more capital? I know its altruistic but should be considered

 Looking back at other TARP bailouts how much did the gov make?
13.4B from Citi
5B from AIG
4.5B from BAC
3.5B from GMAC

The gov has gotten paid back on the sr prfd, swept extra (although could be considered fee for backstop), and is going to make $$$ on the warrants even at a penny a share. Again I dont think for one second the fed gov is going to be nice and not make extra $$$ but the people buying the new shares are in the drivers seat. Not the gov. The gov needs to unload and can only dictate price so much. Yes they will push for a high price but the new $$$ will push back. Wound'nt you?

I have talked about this with many common holders and the end arguement is always who is going to buy the new shares if they cant get a good return? Correct! But what they confuse is the fact that there is an inverse relationship between the new capitals' return and the legacy common share price. Same with the Sr. Preferred via conversion.

What if the gov puts execution/speed over gross profit in light of the demands of new money/market expectations?

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12757 on: June 19, 2019, 11:48:54 AM »
Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway.

Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in.

This is one downside scenario for the commons, especially compared to the juniors.

Calabria has said a few times that Fannie and Freddie will be left to raise the capital themselves. How much behind the scenes input treasury and fhfa have in reality is something that probably won't ever be known.

If it is left up to the co's then i don't see the need for a super low common price, especially if they have multiple years to raise capital, but we'll see. You pay your money, you take your choice.
[E]xpedience does not license omnipotence.

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cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12758 on: June 19, 2019, 11:57:26 AM »
Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway.

Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in.

This is one downside scenario for the commons, especially compared to the juniors.

Calabria has said a few times that Fannie and Freddie will be left to raise the capital themselves. How much behind the scenes input treasury and fhfa have in reality is something that probably won't ever be known.

If it is left up to the co's then i don't see the need for a super low common price, especially if they have multiple years to raise capital, but we'll see. You pay your money, you take your choice.

disagree.  the entire capital raise will be multistep process and fhfa/treasury will run the show at the beginning.  at some point after the initial raise the companies will take over

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #12759 on: June 19, 2019, 03:48:10 PM »
Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway.

Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in.

This is one downside scenario for the commons, especially compared to the juniors.

Calabria has said a few times that Fannie and Freddie will be left to raise the capital themselves. How much behind the scenes input treasury and fhfa have in reality is something that probably won't ever be known.

If it is left up to the co's then i don't see the need for a super low common price, especially if they have multiple years to raise capital, but we'll see. You pay your money, you take your choice.

disagree.  the entire capital raise will be multistep process and fhfa/treasury will run the show at the beginning.  at some point after the initial raise the companies will take over

+1 No way fannie and freddie are going to raise capital themselves. They are powerless at this time and likely will be to the very end. FHFAs proposed capital rules are the antitheses of not having imput.  They have no control over how much capital they are going to need/get or how they get it. They are going to be told what to do every step along the way by treasury. Who has a fiduciary duty to common share holders at this time?

I guess this is the point that many common holders have (not arguing with you or at you DRValue) not quite understood or get. In this situation no one is the legacy common holders friend. No one. Not treasury, not new capital, not "Fannie and Freddie", not the jr preferred.  Both new capital and Jr Preferred only benefit to gain more the lower the prices goes. My return as a Jr Prd share holder and new moneys return gets significantly higher the lower the price goes in a conversion. Secondly I wouldn't trust treasury for shit. They do not have the common shareholders best interest in mind and have no duty to do so. Almost nearly if not all of the new equity is going to come at the legacy commons expense. At this time, not knowing the governments plan it is a complete 100% gamble as to what the outcome could be in regards to dilution.  At least in the jr prfd there is a par value, a contract, and capital structure. Hell there are some on the board who are still leary of getting par for the prfd, let alone the outcome of the common.

Commons outcome is best if the capital build takes forever, jr prd doesn't convert or is nice in conversion, new equity is ok getting hosed, and capital levels are held low. What are the chances of that happening?

Ill get on my soap box for this but lastly AFAIK Tim Howard holds mostly common shares and thus his latest piece on how FnF shouldn't hold too much capital. But in all honesty aren't we all in this mess because FnF did not have enough capital in the first place? Yes the banks Fd em and they were at fault too, and fannie needed some reform but at the end of the day a FnF that holds more capital is going to be safer.  If anyone else looked at this from the outside it would be insanity to think that less capital should be held to support common legacy stock prices. Lastly if FnF really dont "need" that much capital they why the explicit or implicit guarantee? Why not have more capital in front of it for the MBS investors? Have less like he proposes so their is less dilution? Talk about insanity. The same was said of banks when the CCAR results came out and we heard that investors will never invest because they hold too much capital and returns will dwindle and yet today the banks seem to manage.  Sure FnF are fundamentally different then banks but if an extra .5-1.5% of capital is needed to finally get them adequately capitalized at the risk of some lower returns and modestly higher G fees then so be it.
« Last Edit: June 19, 2019, 03:50:08 PM by orthopa »