Fannie Mae-No Politics (FNMA)

[kthomp19]

If Mnuchin (as he cites) was against a write-down (or write-off) of the SPS due to potential legal &/or political fallout issues, what IYO WILL Ultimately happen with the SPS + the large (& growing) value of the Liquidation Preference (LP)? Vis-a-vis the JPS?

At the moment I think there is a 75% chance that Treasury will convert the seniors to commons and a 25% chance that they write them down to zero.

Mnuchin didn't want the JPS to be structurally Senior to the SPS which would iccur withthe write-off or conversion to Equity/Commons, so will the SPS + LP be written down on a pari-passu basis with the JPS (which I believe Mnuchin was proposing)?

Yes. In the conversion scenario, Treasury would have to take a haircut on the full value of the liquidation preference because the companies themselves are worth less than the liquidation preference. In late 2020, Mnuchin said Treasury would not be willing to take an equity position that ranked below the existing junior prefs and so he insisted that any haircut taken by Treasury be shared by the juniors. Back then it would have been a 70% haircut for both Treasury and the juniors, right now it would be somewhere around 55%, and in 2026 (at least for Fannie Mae) it will bottom out at 30-35%.

In the writedown scenario the juniors will go to around full stated (what most of us call par) value.

Don't get me wrong, I would very much prefer Treasury to write down the seniors instead of converting them. But I try not to make the mistake of allowing what I want to happen to affect what I think will happen.

Keep the SPS, but write-down the LP?

Yes. I expect the funding commitment in the SPSPAs to continue after conservatorship ends, and that commitment is tied to the existence of the seniors so the seniors themselves cannot completely disappear. They had a liquidation preference of $1B per company when they were issued and I use that as my baseline assumption for what the liquidation preference will be after either a conversion or writedown.