FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[investorG]

@IG

I believe that the GSE bankers will want the junior prefs gone (as well as the senior prefs of course), and to do this there needs to be a package offered to junior pref holders to incent 2/3rds of each class to accept.  the most interesting aspect of the package will be the exchange into common feature, but it may also involve a distribution of  below market rights to common stock. the only thing not likely on offer is cash.

I was guessing more it would be voluntary exchange process rather than spending the effort to get 2/3 in so many classes.  They could likely clear out the bulk of the $33bn this way. 

If they ever offered you a package whereby they honorably retired the sr pref and suggested you convert at a ratio near or slightly above moelis, while at the same time Calabria said many years before dividends resume -- would you say I'll keep my dividend-less jr pref even if the big guys went through with the voluntary exchange that they theoretically negotitated?

[Midas79]

I think those hoping for something like an 8-10x exchange ratio for jr pref to common are likely to be disappointed.  If we even get to the point of a deal / exchange, the Jr pref has less leverage than most assume given the govt's warrants and commoners interests are likely aligned plus the threat of not turning on the non-cumulative dividends for many years (I don't think a common dividend is necessary to sell shares).  Moelis was more like 3x.   If they would fairly retire the sr pref I guess the jr pref holders would take something near or slightly above Moelis.

12.5x is my top-end scenario based on the Citi conversion, where the conversion was offered at 3x the previous day's ratio. FNMAS just hit 4x FNMA today. I won't be disappointed if it doesn't happen, but since FNMAS is 4x FNMA right now, I don't expect a conversion offer at anything lower than that. Otherwise it will be declined or undersubscribed, defeating the purpose.

4.5x (4.5 common shares per $25 of par value) is my baseline scenario at the moment, though I'm probably going to adjust this upward with Phillips' talk of a conversion at market value. 4.5x would require the commons to reach $5.56 before the conversion is offered, and I think that's a stretch.

The first Moelis plan got this right, with its 3.5x conversion ratio somewhat above that in the market. The updated plan has conversion ratios of 1.7 and 2.1 which just won't get it done. The cases have to be settled, and a weak conversion offer like that doesn't do any good. Also remember that the Moelis plan was paid for by pref shareholders; I find it very suspicious that their plan would disproportionately benefit the commons.

The idea that the existing prefs' dividends could remain off for a long time is utter garbage, though. There's no way the cases get settled while this is possible, and I disagree that selling common shares will be easy with no short-term prospects of a common dividend. Why make the capital raise harder rather than just turning the pref dividends back on or offering them a generous conversion and saving money at the same time?

[no_free_lunch]

What are peoples thoughts on the federal election and in particular how a win by the Democrats might impact the preferreds. Warren and Sanders are down so assuming a more centric candidate could the privatization still occur?  In my mind the selloff was driven by the timelines stretching past the election and this is my concern as well. However there is huge and high probability upside if Republicans win so it is just a question of what these things are worth under the Dems to balance the odds making.

Could court wins lead to some type of preferred redemption event even under a less friendly administration?

[cherzeca]

@onyx

"If he is referencing the common, no issue.  But if the prevailing market value of the Jr's is included in the exchange calculus, and the Jr's aren't trading at or near par, Jr holders won't view this as "fair"."

this junior pref for common exchange at par as opposed to trading price is something that the Ps will insist on in order to settle litigation.  now, it is fair to say that the rafter case before Sweeney is a common shareholder case (Ackman) and the Fairholme action before Lamberth includes both junior prefs and common classes, so there will be some division within the P ranks but I think the balance of power among Ps falls decidedly to the junior prefs

I took the "prevailing market prices" part of Phillips's exchange comment to refer to the common share price, i.e. the juniors will be offered a conversion at a common share price based on that in the market at the time of conversion. Citi offered their prefs a conversion at 85-95% of par at $3.25, where $3.25 was the average of the previous 22 trading days' common closing prices.

That's what I'm expecting with FnF, and is the basis for the tweet I made earlier today. Shorting the commons to buy prefs, driving the common price down for a bigger conversion ratio, and then covering the short with some of the converted shares is highly tempting if there is a strong reason to believe that FnF's conversion will work like Citi's.

https://twitter.com/midas79_/status/1201551381733281792

imo it's apples / oranges bc -- among other reasons -- the government wasn't aligned with commoners in Citi the same was as it is here with $50bn+ in potential equity value from warrants.   I do agree that the Jr pref has some litigation and perhaps precedent advantages in this potential negotiation.  the relationships to me are a wash due to possible public perception problems. I sincerely hope that all 3 buckets don't get greedy, there's likely a lot of potential market cap to share with each (and the new investors as the 4th) if it's done right.

actually this is wrong.  there are many similarities.  see pps 14-16 of https://fas.org/sgp/crs/misc/R41427.pdf

[cherzeca]

@midas

you have me thinking about whether big junior holders will arbitrage common/juniors going into the negotiation.  after all, these guys are arb mavens.  long junior/short commons improves exchange ratio and is hedged by the future receipt of common in the exchange.

[allnatural]

last few trading days the ratio between common and pfds are widening (from ~3x to over ~4x). could it be guys shorting common in anticipation?

[onyx1]

@investorG

"I don't think a common dividend is necessary to sell shares."


Can you explain how you have come to this conclusion in the context of raising $60bln or more in capital?

[Midas79]

@midas

you have me thinking about whether big junior holders will arbitrage common/juniors going into the negotiation.  after all, these guys are arb mavens.  long junior/short commons improves exchange ratio and is hedged by the future receipt of common in the exchange.

This is exactly what I was thinking. I didn't use the term arbitrage but I probably should have. If the big junior holders have as much influence as I think they do, this is exactly the kind of thing they would do. In fact, they would be stupid not to.

I still agree with something orthopa said a while back about the juniors not just wanting to win, but win versus the commons. Ackman bought some prefs in 2017 and a lot more in 2018; we will soon find out what he did in 2019. I found his pro-common comments very suspicious: he was either talking his book or trying to manipulate the market.

[investorG]

@onyx

"If he is referencing the common, no issue.  But if the prevailing market value of the Jr's is included in the exchange calculus, and the Jr's aren't trading at or near par, Jr holders won't view this as "fair"."

this junior pref for common exchange at par as opposed to trading price is something that the Ps will insist on in order to settle litigation.  now, it is fair to say that the rafter case before Sweeney is a common shareholder case (Ackman) and the Fairholme action before Lamberth includes both junior prefs and common classes, so there will be some division within the P ranks but I think the balance of power among Ps falls decidedly to the junior prefs

I took the "prevailing market prices" part of Phillips's exchange comment to refer to the common share price, i.e. the juniors will be offered a conversion at a common share price based on that in the market at the time of conversion. Citi offered their prefs a conversion at 85-95% of par at $3.25, where $3.25 was the average of the previous 22 trading days' common closing prices.

That's what I'm expecting with FnF, and is the basis for the tweet I made earlier today. Shorting the commons to buy prefs, driving the common price down for a bigger conversion ratio, and then covering the short with some of the converted shares is highly tempting if there is a strong reason to believe that FnF's conversion will work like Citi's.

https://twitter.com/midas79_/status/1201551381733281792

imo it's apples / oranges bc -- among other reasons -- the government wasn't aligned with commoners in Citi the same was as it is here with $50bn+ in potential equity value from warrants.   I do agree that the Jr pref has some litigation and perhaps precedent advantages in this potential negotiation.  the relationships to me are a wash due to possible public perception problems. I sincerely hope that all 3 buckets don't get greedy, there's likely a lot of potential market cap to share with each (and the new investors as the 4th) if it's done right.

actually this is wrong.  there are many similarities.  see pps 14-16 of https://fas.org/sgp/crs/misc/R41427.pdf

some similarities, more differences.  a) I believe the government converted their TARP preferred to common at the same time and same terms as other preferred securities (much of which they were actually not senior to) --- going into the negotiation they were actually on the same team as the other preferred, which is not the case here on the warrants.  and b) there was hysteria back then to increase the common equity component of capital vs preferred and so they needed a big bang to incentivize the prefs to convert; I agree in this instance there would need to be incentivization, I'm just suggesting I wouldn't advise par / $3 (8x+) as a likely ratio in this potential scenario.

[investorG]

@investorG

"I don't think a common dividend is necessary to sell shares."


Can you explain how you have come to this conclusion in the context of raising $60bln or more in capital?

Well it seems like putting the cart before the horse at the moment with the delays but if they get going I'd expect most of the ~ $125bn or so in capital needed to come from retained earnings and private investments compared with the re-IPO.   Also, many potential investors understand the situation to build rather than dispense capital for a few year period, plenty of companies come out the gate not paying dividends for some time if there are good reasons not to.