Even if we calculate a lower multiple the Earnings Power of Fannie Maes business is incredible. The below example of a secondary offering to raise the capital required by the FHFA and remove the Treasury out of our business is not hard to do.
If the FHFA would adopt the suggestion from Mr Howard, at 2.5 percent capitalization requirement this would open up, and facilitate, a path for the companies out of conservatorship.
If the Treasury would deem the liquidation preference paid and the Senior Preferred Stock canceled the company's common stock could be relisted on the NYSE and trade at fair value, this could happen only if the Treasury would assure the market that the company has been returned to shareholders as a for profit publicly traded company. The company could still function for the purpose of its charter.
Example of a Secondary Offering IPO calculated for Fannie Mae.
From 2nd Quarter 10Q 2022,
Quote: “Fannie Mae is a leading source of financing for mortgages in the United States, with $4.3 trillion in assets as of June 30, 2022.” End of Quote.
$4.3 trillion x 2.5 percent = $107.5 billion of total assets minus $56.4 billion company's net worth = $51.1 billion amount in a secondary offering to adequate capitalization.
Secondary Offering IPO would add Equity (cash) to the balance sheet, the secondary offering contributes the necessary capital to satisfy the FHFA requirement under the set capital rule. Keep in mind, new investors are buying earnings power of the business, the Shareholders are not giving away the company in a secondary IPO without a price; Investors are doing just that buying into the company.
Fair Market Value of the Earnings Power of the business $45.64 per share. (this calculation includes the 79.9% warrants converted to common stock). How much of a discount of the fair value the company would have to give up to attract new investors to participate in such a secondary offering I am not sure. The below example I will use a 15 percent discount.
Fannie Mae
07/29/2022
Reports $4.7 Billion for Second Quarter 2022
EARNINGS POWER OF THE BUSINESS
Market Cap $263 Billion
Fannie Mae’s common stock outstanding 1,158,087,567
$4.7 billion net income for the second quarter of 2022.
Fannie Mae’s net earnings $4.7 billion per quarter, a projection of $18.8 billion net per year.
With the WARRANTS: Fannie Mae’s common stock outstanding 1,158,087,567 diluted by the warrants at 79.9 percent adds a total of 5,761,629,686 shares outstanding…
$18.8 billion net / 5,761,629,686 = $3.26 per share of earnings,
PE Ratio of 14 x $3.26 = $45.64 per share intrinsic value,
Market Cap 263 billion / 5,761,629,686 billion shares = $45.64 per share intrinsic value.
Example: If the company is required an additional $51.1 billion as a capital requirement to reach the $107.5 billion of the 2.5 percent of total assets, and to make the secondary offering attractive the price per share could be at extreme discount of 15 percent and in this case the secondary offering would price at $38.79 per share;
$45.64 Per Share Intrinsic Value minus 15 percent = $38.79
$51.1 billion secondary IPO / $38.79 = 1,317,349,832 billion new shares.
After the secondary offering a total of 7,078,979,518 billion common shares outstanding.
Market Cap 263 billion / 7,078,979,518 billion shares = $37.15 per share intrinsic value.
FROM A PRIVATE INVESTOR POINT OF VIEW:
Example with Warrants:
Estimated Net income per year $18.8 billion / 7,078,979,518 billion shares total after secondary offering = $2.65 per share net income per year; amount of net profits Fannie generates per year per share.
Secondary Offering priced at $38.79 per share minus $37.15 per share Intrinsic Value after secondary offering = $1.64; the new equity owners are buying $1.01 per share net earnings per year for $1.64 per share; $2.65 minus $1.64 = $1.01 per share.
Again, new investors are buying earnings power of the business, shareholders are not giving away the company in a secondary IPO without a price, Investors are doing just that buying into the company.
Market Cap 263 billion / 7,078,979,518 billion shares = $37.15 Per Share Intrinsic Value.
Treasury holds 4,603,542,119 billion shares x $37.15 = $171 billion.
Common Shareholders 2,475,437,399 billion shares x $37.15 = $92 billion.
Individual shareholders multiply number of shares x $37.15 = intrinsic value of your holding.
In my calculation no amount of dividends were added for the JPS. The JPS are on the books at a small amount of company equity in the amount of 19.1 billion. The JPS are not due any amount of accumulated backward dividends, every issue of JPS are Non Cumulative.
The advantage of the JPS is in a receivership; And receivership is not in discussion any longer.
Conclusion, the GSEs business model, simply there’s no better. So, Fannie Mae can issue, at a later date in time (no rush), Non Cumulative Preferred Stock replacing the higher dividend payment to the existing JPS at a lower payout rate. The JPS Shareholders receive Par Value with a New offering.
