Fannie Mae-No Politics (FNMA)

[kthomp19]

Combining several responses here.

I just fail to see how any serious new investor is going to put money into FnF if there will always be a liquidating preference sitting above them and that liquidating preference is taking all of the profits.

The seniors only get all of FnF's profits once FnF hit full capitalization, or $266B in core capital grossed up by asset base increases. I use 2.5% per year as a ballpark. But the seniors don't take all the profits until full capitalization, and even then they only get whatever is not paid out to other shareholders. The seniors are now in the back of the line in terms of dividends. They won't allow FnF to ever go above the 4% capital mark, but have no effect in terms of getting there.

"If the company shall issue any shares... of up to $70 billion... then the company shall pay down the liquidation preference of all outstanding shares of Senior Preferred stock pro rata."

This would seem to cap their ability to pay down the SPS, meaning the liquidating preference will always be there. And it will always require a 10% dividend until it is gone. Who would ever put money into that?

No, read the section more carefully. The GSEs each get to keep the first $70B of commons they raise. All capital raises after that have their proceeds go to Treasury instead of FnF, and those proceeds pay down the seniors. That's a far-down-the-road consideration.

Also notice that FnF can't sell any prefs at all without Treasury's consent, and even then Treasury would get all the proceeds, meaning investors wouldn't bother. It appears I was right when I said that FnF's capital raises will be all commons; I used to qualify that with "unless the juniors are converted" but it appears we are getting all-common raises even then due to the new wording of Section 5.2.

My understanding is that the lower court ruling (5th circuit) suggested that the SPS was repaid, meaning no liquidating preference.

A minority voted to strike down the NWS as remedy for the constitutional claim, but I don't think they specified what form that would take, let alone saying the seniors should be gone. Here is a link to the opinion if you want to search it.

I'm not quite sure why Mnuchin didn't go ahead and exercise the warrants right now? Why leave that Yellen? What would be the strategy?

This is a good question. It's clear that Treasury intends to exercise the warrants in full, so just doing so rather than making capital raises contingent on that would have made more sense. I can only guess as to why; my first thought is to give Yellen a reason to allow recap and release so as not to basically throw the warrants in the trash.

I'm not quite sure where it says the senior liquidating preference gets reduced by future equity raises? Can you post a quote from the amendment that says that, or is it an assumption?

Read paragraph 4(a) at the top of page 6. It says all capital raises other than the first $70B of commons for each GSE have to have their proceeds go to Treasury instead of FnF, and the seniors get paid down by that amount. Of course, I don't think FnF will ever find investors who are willing to write checks and not have that money count towards capital.

Apart from a favorable SCOTUS ruling (or potential lower court rulings), by my calculation this amendment fairly well caps legacy commons at roughly $8 in the short term

How do you calculate that?