Fannie Mae-No Politics (FNMA)

[kthomp19]

I don't really understand the argument why a retained earnings scenario is bad for the pref? It seems to me that equity value adds to their liquidation prefernce seniority and it's unlikely they would convert for less than par with material equity behind them?

It's not bad for prefs. But the common nonsense view is that a long capital build using only retained earnings, or an equity raise after many years of retained earnings, is better for the commons than the prefs because it would result in less dilution.

Not only is this scenario nonsense (Calabria wants capital raised as soon as possible, and Mnuchin said capital raises need to be part of the recap), but the existing commons will still be heavily diluted even if the first capital raise does happen several years out. FnF won't get unlimited time to hit their core capital requirement, which grows with the size of the asset base and will be $300B in five years if the asset base grows at 2.5% per year. Investors will be tapped for $150B worth of commons, or at least 60% of the market cap, so they will demand even more than that in equity. With Treasury's warrants, existing commons will be lucky to retain 5% of the overall equity in the end. That comes out to about $7 per share in 5 years' time.

I imagine it would become progressively harder to keep the dividents cut off in such a scenario. It may be better for commons but don't see why bad for pref.

Agreed. When capital is raised, dividends will have to be restarted or the juniors will have to be offered a conversion; there won't be nearly enough appetite for common shares with no dividend prospects of utility-like companies.

The most common timeframe Calabria has given for raising capital is 2021. Nothing he has said comports with waiting several years to raise capital; on the contrary he said in this Bloomberg interview that he wants capital raised sooner rather than later (at 3:34 and 6:01).

I also don't understand why they wouldn't keep the COF-based pref outstanding? The interest rate on that is close to zero and they can't raise something that cheap today. Why would they redeem that and then turn around and raise more expensive equity?

I agree here as well. I don't own any of the low-dividend preferred series for just this reason. The lowest dividend rate I'm willing to own right now is 5%, and most of my shares are near or above 6% (FNMAM, FMCKI, FMCCT).

Ditto preferred generally. Why redeem preferred at 5% and then replace with common at a higher discount rate?

Redeeming the prefs for cash makes no sense because offering them a conversion to commons, one generous enough to get them to accept, accomplishes the same goal of clearing the capital structure above the new commons and allowing FnF to issue new prefs while costing zero instead of $33B.