Fannie Mae-No Politics (FNMA)

[kthomp19]

I have never understood the infatuation with a conversion from JPS to common.

Have you ever understood the even greater infatuation with the idea that a conversion won't happen?

This kind of share exchange is common in restructurings, and a recapitalization is a form of restructuring (the new investors will have to get equity in return for their capital, changing the prior ownership percentages). It is much easier to sell new commons in a re-IPO if a junior-to-common share exchange happens first compared to it not happening because it is a costless way to remove $33B of liquidation preference (which does matter outside an actual liquidation) and $2B of dividend preference from in front of the new commons.

You have always been able to buy them freely.

Yes, but the current market ratio of less than 4 FNMA for 1 FNMAS is terrible. If the juniors are truly worth 20 cents on the dollar then the commons are worth $0.60 at best, and more likely something like $0.25. Impaired preferred shares means commons are near worthless, that's how capital structures work.

If I could get 10 FNMA for 1 FNMAS on the open market I would consider it. 3.8:1 is a horrible ratio to convert at freely.

There are decent reasons to buy JPS, largely based on risk tolerance, but conversion, to me, has never been a sound rationale for doing so.

To each their own. The smartest and most plugged-in people I have talked to all think such a conversion is either highly likely or a certainty. Given the large number of sound reasons for there to be a conversion, and the complete lack of reasons to not do one, I agree with them.