Fannie Mae-No Politics (FNMA)

[kthomp19]

(don’t remember the details of under what circumstances it could be retired)

This is an extremely important point, one that so many get wrong.

FnF did not and does not have the ability to pay down the seniors any time it wants.

The proof is in Section 3(a) on page 3 of the senior preferred stock certificate. Normally I don't quote such long sections, but I will do so here while placing the important parts in bold.

3. Optional Pay Down of Liquidation Preference
(a) Following termination of the Commitment (as defined in the Preferred Stock Purchase Agreement referred to in Section 8 below), and subject to any limitations which may be imposed by law and the provisions below, the Company may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred Stock pro rata, at any time, in whole or in part, out of funds legally available therefor, with such payment first being used to reduce any accrued and unpaid dividends previously added to the Liquidation Preference pursuant to Section 8 below and, to the extent all such accrued and unpaid dividends have been paid, next being used to reduce any Periodic Commitment Fees (as defined in the Preferred Stock Purchase Agreement referred to in Section 8 below) previously added to the Liquidation Preference pursuant to Section 8 below. Prior to termination of the Commitment, and subject to any limitations which may be imposed by law and the provisions below, the Company may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred Stock pro rata, at any time, out of funds legally available therefor, but only to the extent of (i) accrued and unpaid dividends previously added to the Liquidation Preference pursuant to Section 8 below and not repaid by any prior pay down of Liquidation Preference and (ii) Periodic Commitment Fees previously added to the Liquidation Preference pursuant to Section 8 below and not repaid by any prior pay down of Liquidation Preference. Any pay down of Liquidation Preference permitted by this Section 3 shall be paid by making a payment in cash to the holders of record of outstanding shares of the Senior Preferred Stock as they appear in the books and records of the Company on such record date as shall be fixed in advance by the Board of Directors, not to be earlier than 45 days nor later than 10 days preceding the date fixed for the payment.

The Commitment, i.e. Treasury's LOC, has been in place since the original SPSPAs were signed in 2008 and has never terminated. Thus the "Following termination of the Commitment" part doesn't apply.

"Prior to termination of the Commitment" is what is applicable here. Carefully reading (i) and (ii) shows that FnF could only pay down increases to the senior pref liquidation preference that occurred due to partial/missed past dividend payments, or partial/missed past commitment fees. FnF have never missed a dividend payment on the seniors nor made a partial one, and have never paid a commitment fee at all. Thus FnF could not and cannot pay down the seniors at any point.

Section 8(b) on page 5 states:

(b) “Liquidation Preference” shall initially mean $1,000 per share and shall be:
(i) increased each time a Deficiency Amount (as defined in the Preferred Stock Purchase Agreement) is paid to the Company by an amount per share equal to the aggregate amount so paid to the Company divided by the number of shares of Senior Preferred Stock outstanding at the time of such payment;
(ii) increased each time the Company does not pay the full Periodic Commitment Fee (as defined in the Preferred Stock Purchase Agreement) in cash by an amount per share equal to the amount of the Periodic Commitment Fee that is not paid in cash divided by the number of shares of Senior Preferred Stock outstanding at the time such payment is due;
(iii) increased on the Dividend Payment Date if the Company fails to pay in full the dividend payable for the Dividend Period ending on such date by an amount per share equal to the aggregate amount of unpaid dividends divided by the number of shares of Senior Preferred Stock outstanding on such date; and
(iv) decreased each time the Company pays down the Liquidation Preference pursuant to Section 3 or Section 4 of this Certificate by an amount per share equal to the aggregate amount of the pay down divided by the number of shares of Senior Preferred Stock outstanding at the time of such pay down.

The optional paydown makes it clear that only liquidation preference increases due to (ii) and (iii) can be paid down. NOT increases due to (i), which is the source of all liquidation preference increases that ever happened.



The upshot here is that the Fifth Circuit (see below) has been given two choices of remedy: either act as if the seniors could have been paid down at FnF's option, or act as if they couldn't. Seeing how only the Third Amendment, i.e. the NWS, is being challenged, do you think they would choose a remedy that violates the original agreement (killing the seniors) over one that doesn't (keeping the seniors but granting FnF $125B cash)? I don't.

Another thing to keep in mind is that the Supreme Court was only asked if a remedy should be available, not to actually apply it. That's why I said "the Fifth Circuit" above; a win by the plaintiffs in the Supreme Court only means they get a remedy, the actual case would be remanded back down to the Fifth Circuit to determine what that remedy is. Then the remedy would be appealed back to the Supreme Court, etc. We are still a ways away from a final win in Collins, even assuming everything goes right.



(from another post)

I am pretty sure in the original agreement (don’t remember where) there was a clause but with the latest agreement they can now retire the LP with the sale of stock.

This has always been there. It is section 4(a) in the same document linked to above. Before, all proceeds from sales of stock would have to go to Treasury to pay down the seniors, and wouldn't go to FnF at all. Thus they wouldn't build any capital, defeating the purpose of raising capital in the first place. The agreement from last week amended this section, allowing FnF to keep the first $70B of common stock sale proceeds, but any other stock sales would have their proceeds go to Treasury instead of FnF.

Note that this makes preferred stock sales useless. The agreement clearly envisions $140B of commons being sold in order for FnF to get out of conservatorship. Mark Calabria himself said “Retained earnings alone are insufficient to adequately capitalize the enterprises. Until the enterprises can raise private capital, they are at risk of failing in the next housing crisis,” so ideas of retained earnings-only recaps should be thrown out. A new FHFA director might see things differently, but that's not necessarily a good thing. If that new director is Mark Zandi, watch out below on the share prices of both commons and juniors.