Fannie Mae-No Politics (FNMA)

[FOFreddie]

Have you looked at the CBO Restructuring Paper - best case scenario is that the GSEs have an equity value of $434 billion.

They need to raise outside equity so best case net equity value is $ 362 bn.

This Paper assumes JPS get paid back at PAR for most scenarios and SPS get priority allocation. The SPS cramdown is the real issue because otherwise the common is accruing equity every day as earnings are retained.

I am assuming a $ 250 bn net equity after dilution for new issuance - $ 150 FNMA and $ 100 FMCC. Best case is that the cramdown does not succeed and in the end we get 20 pct of the equity of the $100 bn for FMCC legacy common as the best case - 100/3.23 bn shares outstanding is $ 30.95 or about 41 X - Best Case. The Best Case for the Freddie JPS is about 1.6 times Par or $40 per share using the 5% div series as the benchmark. 25 plus 12 years lost dividends or 25 + 15 in lost dividends - At $ 2 market price this is a 20X payoff. Although these scenarios are very reasonable in the capital markets it is assuming the USG wants to treat investors fairly. Mr. Market has really got his teeth kicked in on this one so no confidence in a fair outcome.

For me the JPS is the better risk v return because there will be time to readjust if things start working out. If they do turn on divs at some point - the value of the JPS will likely increase much more for the JPS because it is unlikely the USG goes beyond the CBO methodology at the start. There is also the unfavorable cramdown risk and dilution risk for common that also makes it a tougher road for common - hence twice the potential payout. The cramdown risk is real but we all should be wary of the precedent that would come with this because it would just be a playbook for future nationalizations.

FNMA probably has more risk because it has more shares outstanding and more outside capital to raise but perhaps more return.

All of these numbers dont matter much until there is a proposal to raise capital by the FHFA which should be released by May 1 under the new Capital Budget Regs. Again - the market is super skeptical that anything good could possibly happen but the current price for common makes sense if you think the potential payoff is 2X JPS BEST CASE. Otherwise the JPS are probably the better investment for most scenarios.
Could it be JPS 25 and Common 5 or less - yes. Just a guestimate and of course I have been wrong for a long, long, long, long, long, long, long, long time.