This isn't true, the value of the JPS recovery actually goes up as GSEs retain more equity bc it means less outside dilution needed. And GSEs themselves are getting more valuable every year as their books of business and earnings continue to grow.
I will give you an example using Fannie.
- Today UST's Fannie LP is $185b, JPS LP is $19b.
- Fannie is worth approx $175b today (17.5b net income x 10 P/E).
- Fannie have a net worth of $64b but needs a minimum leverage requirement of 2.5% ($114b) to exit cship, which means $50b needs to be raised today from outside investors
- So in this example IPO investors get 28% of Fannie ($50b/$175b), and the remaining $125b is split up between UST and JPS on equal conversion. UST gets 90% ($185b / $204b) and JPS get 10% ($19b / $204b).
- That works out to UST getting 90% of the remaining $125b equity value left ($112.5b) and JPS holders getting 10% ($12.5b).
- $12.5b works out to 65% recovery for JPS today.
Now fast forward 3-4 years, Fannie was able to earn $50b over 3-4 years and no longer needs to raise external capital.
- UST's Fannie LP is now $234b ($184b LP + $50b LP increase from retained earnings), JPS LP is still $19b.
- 3-4 years in future Fannie is prob worth approx $200b ($20b net income x 10 P/E). As earnings powers grow between now and then.
- So in this example $200b equity value is split up between UST and JPS on equal conversion. UST gets 92.5% ($234b / $253b) and JPS get 7.5% ($19b / $253b).
- That works out to UST getting $216b (92.5% * 200b equity value) in value and fannie JPS getting $15b (7.5% * 200b equity value which is ~80% recovery for fannie JPS).
So as you can see recovery actually increases as GSEs retain earnings because even though UST LP goes up, the need for ipo/cap raise dilution goes down. The more the GSEs retain the better the recovery for JPS.
