Fannie Mae-No Politics (FNMA)

[kthomp19]

Thank you for your answers. I too appreciate your posts very much.

Glad to hear this, especially from a solid contributor like you.

This board was unreadable back when the ignore list was restricted to 5 members, now that it is unlimited it is much easier to find the good information and not the bad.

I wonder if JPS shareholders are not also affected by HERA's succession clause.

Ostensibly FHFA also succeeded to the junior pref holders' rights to vote in their own contracts. Here is the applicable language:

Except as described below, holders of Preferred Stock will not have voting rights.

Without the consent of the holders of the Preferred Stock, we will have the right to amend the Certificate of Designation to cure any ambiguity, correct or supplement any term which may be defective or inconsistent with any other term or to make any other provisions so long as the amendment does not materially and adversely affect the interest of the holders of the Preferred Stock. Increasing the authorized amount of the Preferred Stock or issuing a series of preferred stock ranking prior to, on parity with, or junior to the Preferred Stock will not be deemed to be materially and adversely affecting the interests of the holders of the Preferred Stock.

Otherwise, we may only amend the Certificate of Designation with the consent of the holders of at least two-thirds of the outstanding shares of the Preferred Stock, with each holder being entitled to one vote per share.

The only ones that can vote on amendments are the holders of the stock. The succession clause doesn't cause FHFA to hold the stock, thus it won't apply here.

Are you sure JPS holders would really be asked f. e. to agree to a haircut (based on contractual rights)?

FHFA and Treasury can certainly play hardball with the juniors and tell them "if you don't take a haircut, we just won't restructure the seniors and conservatorship will continue". But there's a limit to how far they can push; 80-90% of par might be accepted, 40-50% likely won't be.

There's also the question of what form that haircut would take. If it's a cash payout at less than par, as little sense as it makes (FnF need to be building capital, not wasting it on things like redeeming the juniors or trying to buy back the warrants), the acceptance would be different than if the haircut is in the form of a lower ratio in a junior-to-common conversion.

Citi's conversion was at 80-90% of par (for the publicly traded series), so FnF's could be similar. But it's easy to structure the conversion to look like a haircut without actually being one because there are two variables: the percent of par and the conversion price. A conversion at 80% of par at $1 is the same as 100% of par at $1.25, but the former allows the government to paint it as a haircut (avoiding the "hedge fund windfall" narrative).

Or could FHFA and Treasury bypass/ignore them in much the same way they bypass common shareholders?

Unless FHFA and Treasury want FnF's post-conservatorship capital structure to be almost entirely preferred shares, the juniors can't be bypassed. FnF could issue new non-cumulative preferred shares that rank above the juniors, but there would be little reason to do so. That would also render the existing common and Treasury's warrants worthless, and force all raised capital to be preferred shares.

There is little reason to go through all those contortions just to try and bypass the juniors. Raising at least some of the capital at the common level makes far more sense and allows for tapping a greater pool of investors.