Fannie Mae-No Politics (FNMA)

[kthomp19]

you own PFD because they become common ?

Only if the commons retain enough value after all the other dilution (either warrants + re-IPO or senior conversion).

so why not own common ?

Two reasons:

1) If the dilution is massive enough, as it could be in the warrants + re-IPO scenario and almost certainly will be in the senior conversion scenario, the commons lose money from here and I would just refuse to convert at all.
2) I don't see how the re-IPO dilution can be small enough to make the commons a better bet than the prefs from here. When I ran the numbers in the past I got $8 as a best case, and $5 as the weighted average.

If the prefs stay at 20% of par and the commons were to go to $0.60 I would own the commons now; I choose the prefs due to the relative market prices of the two classes.

what assumptions are you using - to go indirectly ?

1) One of the two Collins remedies takes place, either by Supreme Court order (unlikely imo) or by negotiation between FHFA, Treasury, and plaintiffs.
2) In the senior conversion route I calculated a common share price of $1.40 in the end, providing no upside from current prices. In the warrants + re-IPO route, I get $5-8.
3) An all or mostly common share capital raise of $75-100B. This is consistent with Calabria and Ackman talking about the largest private equity raises in history (Petrobras at $70B is the best comparison).
4) The re-IPO investors will not participate unless they end up with at least 2/3 of the total equity, and perhaps more. 2/3 would dilute Treasury's warrants to 26.7% of the total and existing commons to 6.7%.
5) The remedy moots all lawsuits but Washington Federal, and since that only concerns money damages to pre-conservatorship shareholders it can be dealt with separately.
6) Release and relisting alongside completion of the re-IPO, with an offer to exchange juniors for commons happening a few months earlier to clear out the capital structure. It is unlikely that new investors will put $75-100B into FnF with $33B of prefs already on the books ahead of the commons (old and new); they will likely insist on a conversion of the juniors, making that a necessary step to recap and release.

I own preferred for a possible advantage they may have in getting to PAR before the common is fully valued

Whereas I think that the prefs will make a higher percentage return from here getting to par than the commons will even when fully valued.