Fannie Mae-No Politics (FNMA)

[kthomp19]

1. Does an equity raise also increase the liquidation preference?

No, it doesn't. The first $70B of common equity each GSE raises accretes directly to capital (all forms: core, Tier 1, CET1). All equity raises after that have their proceeds go to Treasury instead of FnF, and the senior pref liquidation preference gets reduced by that amount.

2. The liquidation preference now sits at 228B - I'm interpreting this meaning once we hit 198B in capital reserves, we begin to pay the 10% dividend, however that amounts to 22.8B (And will only increase). 22.8B is more than what the GSE's make annually, so upon capital reserve end date, this equates to a NWS correct?

The NWS-like dividend of all net worth increases from the previous quarter doesn't kick in until FnF have hit full with-buffers capitalization, under Calabria's rule (even if a future FHFA director changes it), and stayed there for two quarters. That's $265B as of June 30 2020, and will likely be over $300B by the time it matters because it is based on FnF's asset base, which grows each year.

At that point, yes, Treasury will get 10% of the liquidation preference in dividends each year, or all of FnF's earnings if it is less (and it almost certainly will be). So it's like the NWS but with a much, much higher cap.

3. If the warrants are exercised, does this make the 10% dividend and liquidation preference null?

No. The seniors and warrants are entirely different things. Per the terms of the document, the warrants must be exercised in full before FnF can sell new common shares.

4. If the answer is yes, I wonder if we see an exercise of the warrants, sooner than expected.

I expect an exercise of the warrants anyway. It could be soon or right before capital is raised.