Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 4194212 times)

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15520 on: May 21, 2020, 09:20:17 AM »
"@midas
Is a prepaid asset (ie the dividend overage from the NWS) classified as equity under GAAP?"

I asked TH once and he said no

Technically, that's not what I asked.

I previously did some calculations on FnF's balance sheets in their 10-K forms, and the numbers they report for core capital were precisely the sum of all equity-section balance sheet entries other than senior pref stock and AOCI.

When (if?) FnF get a tax credit from Treasury, they will book it in the asset section of the balance sheet. The offsetting entry has to go in the equity section somewhere. My question is: will it go to a line item that counts towards core capital (tier 1) and/or CET1? If the offsetting entry is in retained earnings then the answer to both is yes, while if it's AOCI (or some new item that they don't count towards core capital) then it's no.


cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15521 on: May 21, 2020, 09:29:18 AM »
Have we settled on what the capital requirement is yet?
Could anyone clearly explain this to their boss?

The main restraint to reach level 1 (non buffer) freedom is the $152bn leverage requirement.  This can include common + preferred.   I guess the $152bn drops to about $140bn in the final rule and $40bn is preferred so roughly $100bn common equity to hit this threshold. 

The buffers are level 2.  The buffers are in the document to satisfy the anti-FnF'rs.   There is wiggle room both in the size and time to get there.   Dividends aren't crucial right away and the exec bonus rules can be massaged per the document's questions.  I guess the $100bn buffers will drop to $80bn so I think about it in four $20bn increments.

So the real common equity requirements are somewhere between 100bn and 180bn but the latter is many years out, big phase in.

the real question is whether investors in capital markets will get fussed by these div restrictions in the capital buffers...I can only say that they have seen this before re the banks after the GFC.  I also think that for issuers like the GSEs that earn a ton of net income, having even a restricted div bucket permits them to repurchase plenty of stock

assuming this is real, this is important:

https://twitter.com/HoldenWalker99/status/1263325016030162944?s=20

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15522 on: May 21, 2020, 09:38:40 AM »
@midas

"When (if?) FnF get a tax credit from Treasury, they will book it in the asset section of the balance sheet. The offsetting entry has to go in the equity section somewhere. My question is: will it go to a line item that counts towards core capital (tier 1) and/or CET1? If the offsetting entry is in retained earnings then the answer to both is yes, while if it's AOCI (or some new item that they don't count towards core capital) then it's no"

this is what I thought, but TH said no B/S treatment, just take untaxed income into income as it comes...(if I understood him right)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15523 on: May 21, 2020, 09:42:13 AM »
As I am settling in, I am getting more comfortable with this capital rule.  I like the incentives to get JPS holders to exchange for new common capital and current JPS holders, linked to future distributions.  Also, with the exceptions to distributions while building capital (hat tip:  Midas and Holden Walker), the current JPS holders see a distribution relatively quickly and are not hostage to new common capital or current common.  And I like the high CET1 for the businesses moving forward.  It means there will never be a concern about capital again.  Overall, a balanced effort.  It's early days in interpretation, but that's my current view.

I come out the same...with the proviso that Calabria will have to be accommodating on the capital buffer build up, so as to help GSEs hit those targets, and can be more of a hard ass on any rebuild up down the road.

but remember, GSEs dont need to hit a 100% payout level...why would fannie need to dividend or repo stock  equal to >$10B per year?  those higher % tranches should look good to politicians though...

beaufort

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15524 on: May 21, 2020, 10:48:20 AM »
As I am settling in, I am getting more comfortable with this capital rule.  I like the incentives to get JPS holders to exchange for new common capital and current JPS holders, linked to future distributions.  Also, with the exceptions to distributions while building capital (hat tip:  Midas and Holden Walker), the current JPS holders see a distribution relatively quickly and are not hostage to new common capital or current common.  And I like the high CET1 for the businesses moving forward.  It means there will never be a concern about capital again.  Overall, a balanced effort.  It's early days in interpretation, but that's my current view.

I come out the same...with the proviso that Calabria will have to be accommodating on the capital buffer build up, so as to help GSEs hit those targets, and can be more of a hard ass on any rebuild up down the road.

but remember, GSEs dont need to hit a 100% payout level...why would fannie need to dividend or repo stock  equal to >$10B per year?  those higher % tranches should look good to politicians though...

I agree with you on the payout ratio observation, competition and that Calabria becomes more of a hard ass as time goes on. 

I also don't accept the common assertion that raising massive amounts of capital, all of it in one lift, is not substantially possible, or even probable.   With clear rules, the GSEs become more attractive.  Even the arguably excessive conservatism can be construed as a positive.  There are lots of huge holders of capital looking for utility-like returns, which is what they will be getting.  It is better to put the money to work and start earning, rather than sitting in cash and watching a respectable, conservative return walk away.
« Last Edit: May 21, 2020, 10:58:07 AM by beaufort »

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15525 on: May 21, 2020, 11:17:52 AM »
As I am settling in, I am getting more comfortable with this capital rule.  I like the incentives to get JPS holders to exchange for new common capital and current JPS holders, linked to future distributions.  Also, with the exceptions to distributions while building capital (hat tip:  Midas and Holden Walker), the current JPS holders see a distribution relatively quickly and are not hostage to new common capital or current common.  And I like the high CET1 for the businesses moving forward.  It means there will never be a concern about capital again.  Overall, a balanced effort.  It's early days in interpretation, but that's my current view.

I come out the same...with the proviso that Calabria will have to be accommodating on the capital buffer build up, so as to help GSEs hit those targets, and can be more of a hard ass on any rebuild up down the road.

but remember, GSEs dont need to hit a 100% payout level...why would fannie need to dividend or repo stock  equal to >$10B per year?  those higher % tranches should look good to politicians though...

I agree with you on the payout ratio observation, competition and that Calabria becomes more of a hard ass as time goes on. 

I also don't accept the common assertion that raising massive amounts of capital, all of it in one lift, is not substantially possible, or even probable.   With clear rules, the GSEs become more attractive.  Even the arguably excessive conservatism can be construed as a positive.  There are lots of huge holders of capital looking for utility-like returns, which is what they will be getting.  It is better to put the money to work and start earning, rather than sitting in cash and watching a respectable, conservative return walk away.

+1.  there is something for everyone in this proposal, and if calabria is accommodating as the capital buffers are built (permitting dividends before the 25% capital buffer tranche is satisfied), then the payout limitations are an acceptable limitation on capital if and when on the way down

investorG

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15526 on: May 21, 2020, 11:55:00 AM »
common has more obstacles than jr pref for imo similar upside.

edit: the max public re-IPO size is probably something like $60bn.   the private markets perhaps could handle more.  whoever puts up that money has to deal with probably further supply for the buffer and/ or secondary sales so they are going to want something cheap.   

edit 2:  if seila doesnt provide backward relief I don't see Tsy providing overage payments in a potential settlement unless collins wins at SC in 2021.
« Last Edit: May 21, 2020, 12:03:09 PM by investorG »

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15527 on: May 21, 2020, 12:57:12 PM »
https://www.treasury.gov/press-center/press-releases/Pages/tg1796.aspx

"Over the last 19 months, Treasury has conducted six public offerings of AIG common stock, selling a total of 1,655,037,962 shares (originally 92 percent of AIG’s outstanding common stock) at an average price of $31.18 per share. Treasury's $20.7 billion AIG common stock offering in September 2012 alone represented the largest single U.S. common stock offering in history [2]."

Treasury sold 51B worth of AIG stock in just over a year and a half and that company had much lower quality earnings and a horrible book of legacy business that came with the purchase of that stock. I know, I held the warrants that went nowhere for years before I dumped them.

If priced well enough and with another 6-8Q of retained earnings, +/- treatment of return $ from Treasury and preferred issuance getting to the first hurdle in 18 months seems very doable.

I think we will all be very surprised by how much the largest public offering in history is (the upcoming GSEs re IPO).

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15528 on: May 21, 2020, 01:22:50 PM »
the mortgage finance business seems to be holding up very well...housing prices steady, interest rates low.  I understand there are millions of mortgages in forbearance, but congress said have at it...how many of these forborne mortgages become truly delinquent is where rubber meets road, but if you told me that something like 1/3 of the nation's businesses would be shut down and housing prices would remain stable, I would say that is crazy
« Last Edit: May 21, 2020, 02:24:20 PM by cherzeca »

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15529 on: May 21, 2020, 02:12:46 PM »
So rough math for Fannie Mae (it's all I can do...)

Total capital requirement 81b
Current equity 14b
Treasury 'refund' 15b
Junior preferred par value 19b
One years 'covid' earnings 6b

Leaves a gap to total capital of 27b.

Right to assume that 27b may be the target common / preferred raise? I know junior preferred could be converted etc..

As this is a new capital paradigm and there are hints of flexibility, retained earnings low dividends and opportunistic capital raises, including debt for the buffers?
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