Fannie Mae-No Politics (FNMA)

[kthomp19]

Long held view that govt. will use warrants and cancel SPS

Like TH. That does maximize their investment - when you do the math.

Tim Howard is absolutely wrong on this front. 99% > 79.9%, it's basic math. The pre-capital raise commons in aggregate will be worth the exact same amount whether Treasury writes off the seniors or converts them, because outside investors have no reason at all to care which of those two happens.

Also, it is the most legal of the convert SPS, cancel Warrants, as example.

Quite the opposite: Treasury believes that writing the seniors off for nothing is what is illegal.

Warrants have been there for 15 years. SPS is made up and never had a conversion feature.

Treasury's AIG preferred shares didn't have a conversion feature either, and that didn't stop the conversion from happening.

So, how many shares will it take for a $25 JPS to convert? A $50?

My guess is 2 or 3 for 25 and 4 to 6 for a 50.

Warrants and a conversion... that prices the commons to be $6 to $9 or so. About right.

I think the preferred conversions will be structured in such a way where Treasury and the juniors (the two parties that would be negotiating, as they negotiated in late 2020) would each get an acceptable percentage of the pre-capital raise equity. In the scenario where Treasury exercises the warrants and writes down the seniors, that could be something like 80% for Treasury and 15% for the juniors, leaving 5% for the existing common. That gives a share price of just under $7, but that assumes that no capital needs to be raised so it's basically an absolute maximum. When put into ratios that would be about 8 commons per $50-par share and 4 per $25-par share, assuming the conversion only depends on par value.

If Treasury decides to play hardball and insists on more, we could see an AIG situation where Treasury ends up with 92%. The juniors would probably get 7% and legacy common 1%, leading to a ratio of around 19 commons per $50-par share.