I made one minor change in the spreadsheet: changing the cap req from 2.5% to 3%, leaving everything else the same. Guess when FnF hit that cap req? The answer might surprise you: it's never.
Thanks Kthomp19. I am not surprised that it would be a long, long, time or even never depending on the requirements. That is what I meant when I said several times, in response to those wanting an organic recap, that "you can't beat the laws of physics".
1) Tim Howard said that in normal (pre-conservatorship) times, FnF paid out around 30% of annual income in dividends.
This is a good point, but I think the Nomura estimate of about 2/3 payout would be more realistic as we are talking the utility model here. I believe that the average payout for utilities as a class is something north of 50%.
2) You haven't accounted for the dilutive effect of a capital raise. If the new investors insist on 2/3 of the overall equity in return for their capital, which I find pretty reasonable (they will be asked for around $100B if it happens in the next several years), you would have to divide your $30 by 3.
That would still be one hell of a return for the commons at the current price.
3) I don't see any way that Treasury would neither exercise the warrants nor convert the seniors to commons. Doing neither would amount to cutting a giant check to common shareholders for nothing in return; terrible political optics plus throwing money into the garbage can doesn't seem like something a President of either party would do.
I generally agree but think cancelling the seniors and exercising the full warrant amount makes the most sense and helps remediate the political optics as well as may give the Government the best overall amount of money. Given that an organic recap is just not practical, it would hopefully help the current shareholders. Of course, a home run in the courts could make all this OBE. Considering, in terms of our court batting percentage, that we are well below the Mendoza line, I would not count on people in black robes to save us.
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