Fannie Mae-No Politics (FNMA)

[kthomp19]

Now you or your friends have found "fulcrum securities" in Fannie, even though the company is not bankrupt.

FnF not being actually bankrupt is irrelevant. Calabria already said that FnF's exit from conservatorship will be treated like a normal bankrupt company's exit from bankruptcy.

So while FnF aren't technically bankrupt, they will be treated as if they are. Calabria said that conservatorship is essentially administrative bankruptcy, with him as the administrative bankruptcy judge. Therefore FnF being in conservatorship is the same as being in bankruptcy, at least in Calabria's opinion. And his is the only one that matters here.

The juniors are the fulcrum right now, and that's where the big money will be made.

You're hoping for a restructuring of the capital structure with a concomitant conversion of JPS into common stock? That is within the realm of possibility. But most likely only for the FNMAS and FNMAT series. The others are cheap capital for Fannie, because with the current low LIBOR they would hardly receive a dividend anyway.

You might want to check the dividend rates of the various series. FNMAJ, for example, carries a fixed dividend rate of 7.625%. There are many other fixed-rate series with rates at or above 4%, well above what one can expect from a preferred stock in this interest rate environment.

In fact, of the 33 FnF junior pref series I follow, only 7 have dividend rates that would be very low right now (<1.5%) if based on the 2-year CMT as many of the contracts state. All the others would yield at least 4%. With bond yields so low, every single one of those pref series should trade above par when dividends resume. Therefore they wouldn't be likely to accept any conversion offer below par.

If we really talk about a conversion of the JPS into commons at some point, then it has been known for quite some time that the SPS was deleted. The conversion ratio will be corresponding.

Yes, the juniors won't accept any conversion offer while the seniors exist. At that point there is no way to estimate a final share count.

But the ratio would be corresponding to what? A hypothetical price rise of the commons when the seniors go away? There is no reason not to offer the junior conversion at the same time as senior cancellation/conversion based on market prices leading up to the offer, meaning that any subsequent common price reaction wouldn't affect the junior conversion offer.