Fannie Mae-No Politics (FNMA)

[kthomp19]

Thanks kthomp, I always appreciate your posts.

And I yours. That response about potential fates for the juniors was spot on.

Someone else asked what are the situations in which JPS go to zero. I know receivership is one, because SPS liquidation pref is so damn high that nothing would be left for JPS, much less common. What are some other scenarios?

I can't think of any others. FnF's capital structure must be restructured to exit conservatorship, and if they are to remain "private shareholder-owned companies" (which they supposedly are now, albeit in name only) then there will have to be the possibility of value for private shareholders. The juniors can't be leapfrogged without destroying the existing common utterly, and I doubt an all-pref capital structure appeals to anyone. Any value at the common level means eventual full par on the juniors.

Also, supposing these entities are turned into public utilities, how does that affect the existing capital structure? I see this mentioned a lot but no one talks about the consequences.

I don't think the capital structure would be any different than if FnF are recapped and released without being utilities. The utility structure, in my view, is more about regulation and shareholder expectations than the actual capital structure.

Since utilities are much more about income than earnings growth, I would expect FnF as utilities to attract investors interested more in income than growth. There might even be capped rates of return, with overages going to Treasury as a sort of nouveau NWS.

Perhaps FnF as utilities would be more pref-heavy in the capital structure, but Watt and especially Calabria had reservations about common equity not being a big enough part of FnF's capital. I would expect decently-sized common dividends after recap and release, especially because FnF don't really have a use for any extra money once they hit full capitalization.

The juniors might even get their dividends turned back on rather than be offered a conversion to common. That's just gravy either way to me.