Fannie Mae-No Politics (FNMA)

[kthomp19]

In what order could the swaps occur as part of the restructuring?

A: First the swap of JPS into common shares (increasing the number of commons from 1.8 to 9 billion). Then the swap of SPS into the combined amount of those 9 billion commons?

OR

B: First the swap of SPS into commons (dilution by a factor of 100, so there are subsequently around 200 billion common shares whose value falls sharply). Then the swap of JPS into those already heavily diluted commons at par value?

Either is technically possible, but the juniors have the ability to turn down an offer, and can resist a hostile attempt by it failing to reach the 2/3 threshold per series, so I don't see A as being realistic.

In fact, I can't see a junior-to-common conversion happening at all while either the seniors or warrants exist, precisely for this reason.

There will also be dilution when capital is raised, so I expect all three things (equitization of the seniors, junior conversion, and capital raise) to happen more or less at once, with the three parties negotiating over who gets what in the end. None of the parties will be willing to have their stake later diluted by any other, with the possible exception of Treasury (which let its Citi warrants, which were for a fixed number of shares, be diluted by a junior-to-common conversion). Existing commons will be left in the cold in this negotiation because they have no say over the process; it will happen during (at the end of) conservatorship.

I believe that (A) would dilute JPS significantly more than (B). JPS could end up being worth as little as $8, not $25.

If A somehow does happen, it would likely be far worse than 32% of par. But again I don't see this as worrisome due to the juniors' contractual rights.

Are there any legal arguments against (A), e.g., that JPS rank higher in the capital stack, which would prohibit (A) and leave (B) as the only valid option?

Position in the capital stack only benefits the juniors vis a vis the commons, not the seniors. Treasury can certainly try to hurt the juniors, but again the contractual rights protect them, and anything less than full par for the juniors would wipe out the existing commons.