Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 4194295 times)

investorG

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15540 on: May 22, 2020, 06:46:09 AM »
To show how crazy the market is last time alot of Fannie preferred traded to the upside at these levels was after Ottings comments in early 2019. Since that time we have had:

1. Calabria sworn in as FHFA head
2. Treasury plan
3. En Banc decision
4. Selia case argued
5. September capital cap PSPA amendment
6. FHFA hired a financial advisor
7. FHFA hired new council
8. FHFA releases capital rule
9. Freddie/Fannie announced RFP to underwrite/come up with recap plan.

Still at these levels market not believing FNMA will be recapped or Preferred get more then ~30% of par. Nuts.

major political risk.  mnuchin and calabria might have a plan for the next 8 months before a likely transition but it's sure not apparent to the mkt.  The political punt in summer of 2019 - per bloomberg story in july - to post-election for a potential 4th amendment + capital raise was disastrous.


Wiggins

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15541 on: May 22, 2020, 07:31:30 AM »
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?

The $19B of junior par value is already included in the $14B. That is, everything else that contributes to the $14B adds up to a combined negative $5B.

Also, the refund from Treasury could come in the form of a tax credit. In that case, I believe that Fannie (and Freddie too, of course) would only add their tax savings to capital as they occur. It could very well take 5-6 years to earn all of that refund.

The upshot is that if a capital raise is needed to hit a particular number then the full amount of the refund won't count, only the taxes they would have paid. At best I can see Fannie getting $2.5B of it back per year, and that would be on earnings of around $13B. Also, I think Fannie will make more than $6B this year ($10B imo) but for now I'll use your number.

If the capital raise happens a year from now, adjusting your numbers for these things leaves a gap of $56B: your $27B plus the $19B of prefs and $10B of unearned tax credits.

Another thing to keep in mind is that $81B is Fannie's risk-based capital requirement. For some reason I can't explain, Calabria decided on a minimum capital standard (he calls it the Leverage Capital Requirement) that's higher than the risk-based one: $89B. Now the gap is $64B if that's the milestone.

Similar calculations give a gap of $42B between Freddie's current core capital (once the seniors are dealt with) and their minimum capital requirement of $63B: Freddie has $9B of current equity, $7B of earnings between now and the capital raise, and $5B of earned tax credits.

So I'm getting core capital shortfalls of $64B for Fannie and $42B for Freddie, or $106B combined. This would have to be the size of the capital raise if it occurs a year from now and is designed to hit the minimum capital standard.

Treasury returning the overpayments in cash instead of tax credits would lower each company's numbers by $10B, for a total capital raise size of $86B.

Quick question: are you factoring in price appreciation of common after cancellation of SPS and re-list to NYSE? Moelis had commons in the range of $14-$17 after warrants and JPS conversion dilution. That adds a lot of Tier 1 capital over the current price of ~$2.20.
« Last Edit: May 22, 2020, 07:34:01 AM by Wiggins »

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15542 on: May 22, 2020, 07:52:33 AM »
Quick question: are you factoring in price appreciation of common after cancellation of SPS and re-list to NYSE? Moelis had commons in the range of $14-$17 after warrants and JPS conversion dilution. That adds a lot of Tier 1 capital over the current price of ~$2.20.

FnF's capital has nothing to do with the market price of the commons.

There is also no guarantee of any price appreciation after said events, let alone enough to get the price above $4 for 30 days to re-list. For all the good news FnF shareholders got in the last 16 months, the price is around 40% lower than it was at the end of January 2019.

A reverse split is the only realistic way to get an over-$4 share price to stick, and I fully expect it to happen later this year. Somewhere between 1:10 and 1:20 is my guess for now.

Moelis 2.0 is completely unrealistic anyway. Why would junior pref shareholders sign up for a plan that involves them converting at a re-IPO price in the teens (a far worse ratio than they could get right now in the open market), and giving existing common holders a much greater return than the junior prefs themselves?

Wiggins

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15543 on: May 22, 2020, 05:28:59 PM »
Quick question: are you factoring in price appreciation of common after cancellation of SPS and re-list to NYSE? Moelis had commons in the range of $14-$17 after warrants and JPS conversion dilution. That adds a lot of Tier 1 capital over the current price of ~$2.20.

FnF's capital has nothing to do with the market price of the commons.

There is also no guarantee of any price appreciation after said events, let alone enough to get the price above $4 for 30 days to re-list. For all the good news FnF shareholders got in the last 16 months, the price is around 40% lower than it was at the end of January 2019.

A reverse split is the only realistic way to get an over-$4 share price to stick, and I fully expect it to happen later this year. Somewhere between 1:10 and 1:20 is my guess for now.

Moelis 2.0 is completely unrealistic anyway. Why would junior pref shareholders sign up for a plan that involves them converting at a re-IPO price in the teens (a far worse ratio than they could get right now in the open market), and giving existing common holders a much greater return than the junior prefs themselves?

OK, thanks for correcting me nicely. Stupidly confusing market cap with capital, to say the least.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15544 on: May 23, 2020, 04:23:52 AM »
To show how crazy the market is last time alot of Fannie preferred traded to the upside at these levels was after Ottings comments in early 2019. Since that time we have had:

1. Calabria sworn in as FHFA head
2. Treasury plan
3. En Banc decision
4. Selia case argued
5. September capital cap PSPA amendment
6. FHFA hired a financial advisor
7. FHFA hired new council
8. FHFA releases capital rule
9. Freddie/Fannie announced RFP to underwrite/come up with recap plan.

Still at these levels market not believing FNMA will be recapped or Preferred get more then ~30% of par. Nuts.

major political risk.  mnuchin and calabria might have a plan for the next 8 months before a likely transition but it's sure not apparent to the mkt.  The political punt in summer of 2019 - per bloomberg story in july - to post-election for a potential 4th amendment + capital raise was disastrous.

No question that took the wind out of the sails big time. Looking back I wonder if it was the capital that they wanted to build. A year and a half before the election is a long lead time to determine to slow things down although the process itself isnt quick by any means.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15545 on: May 23, 2020, 04:53:41 AM »
Quick question: are you factoring in price appreciation of common after cancellation of SPS and re-list to NYSE? Moelis had commons in the range of $14-$17 after warrants and JPS conversion dilution. That adds a lot of Tier 1 capital over the current price of ~$2.20.

FnF's capital has nothing to do with the market price of the commons.

There is also no guarantee of any price appreciation after said events, let alone enough to get the price above $4 for 30 days to re-list. For all the good news FnF shareholders got in the last 16 months, the price is around 40% lower than it was at the end of January 2019.

A reverse split is the only realistic way to get an over-$4 share price to stick, and I fully expect it to happen later this year. Somewhere between 1:10 and 1:20 is my guess for now.

Moelis 2.0 is completely unrealistic anyway. Why would junior pref shareholders sign up for a plan that involves them converting at a re-IPO price in the teens (a far worse ratio than they could get right now in the open market), and giving existing common holders a much greater return than the junior prefs themselves?

OK, thanks for correcting me nicely. Stupidly confusing market cap with capital, to say the least.

Another dumb question on my part. My expectation like many others is that preferred get converted to common. Some have hypothesized a haircut for preferred but if that's the case how is treated for capital levels? ie There is 19B of Fannie preferred par value. If converted at say 80% of par you convert it into 15.2B of common. Does that 3.8B of capital just disappear into thin air? If not what is the offsetting asset that would keep the capital amounts pari passu?


DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15547 on: May 23, 2020, 06:40:07 AM »
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?
[E]xpedience does not license omnipotence.

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Covid-19_Survivor

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15548 on: May 23, 2020, 07:24:48 AM »
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?

No look cheap math:
Worth $200 bil
Needs $150 bil

commons + jps $50 bil
jps $33 bil
commons $17 bil

edit to actually answer poll:
1) 8.5%
2) 16.5%
« Last Edit: May 23, 2020, 07:31:47 AM by Covid-19_Survivor »

emily

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15549 on: May 24, 2020, 12:17:17 PM »
Fannie Mae and Freddie Mac have a lot of cash. Do they still need to raise money?

"Common equity Tier 1 covers the most obvious of equities a bank holds such as cash, stock, etc"
https://www.investopedia.com/terms/c/common-equity-tier-1-cet1.asp