Fannie Mae-No Politics (FNMA)

[JOoa0ky]

I'm not sure why people get so excited about converting preferred to common. In some cases that's built into a preferred share's contract as an incentive to buy at a lower interest rate, but doing it after the fact like this is really meaningless.

I would likely just sell my preferred before the conversion date since I wouldn't want so much in one stock. The market should price the preferred at the same price as the underlying stock.

A conversion is three transactions:
1. An IPO of new shares
2. A redemption of the preferred shares
3. A purchase of those IPO shares

For tax reasons I'd rather just sell, then decide later if I want to buy more common shares.

But yes - converting shares is a way to recapitalize by diluting commons with the new shares. Recapitalizing by issuing new preferred protects the common share prices, but is slower and eats into profits.

I'm not excited about the conversion. Its just that its a cheaper way to recapitalize. The par value gets added back onto the balance sheet after conversion if I am understanding it correctly. No capital has to be spent to add this 30B+ back to the balance sheet. If you get them to convert at less than par then you actually made a return essentially.
- After effects are common dilution but no div obligations

The redemption and then issue new prefs at same par value will get you to the same balance sheet number but you are left with paying a div for the new prefs.
- After effects are no common dilution but there are div obligations
- That's a bias towards commons


Of course what this ultimately comes down to is the capital rule. How MUCH capital is needed/needed to be raised and that will determine if conversions are necessary and how much secondary shares will need to be issued.


Personally I feel like too many people choose a side FIRST. Pref or common and then start thinking of scenarios as to how to maximize the outcome of their position.

Rather than that, I think it is more likely if you think from fannie and freddie's POV. How do I recapitalize as reasonably fast as possible while also in the least expensive way as possible. That should be the starting point for you are sitting on a fence. Whether you fall to the left (commons) or right (pref) will depend on all the clowns that you have to negotiate with for settlement.