Fannie Mae-No Politics (FNMA)

[kthomp19]

Can the preferred can be converted

Yes. And that applies whether you're talking about a senior-to-common or junior-to-common conversion. Both almost happened in late 2020.

if so how much common shares

That's not a fixed number, it can only be estimated.

The juniors cannot be forced to accept a conversion to common. The only way to accomplish such a conversion (which would be good for the companies because it would raise their CET1 capital by $33B, and their exit from conservatorship threshold is dependent on their CET1 capital) is to give the juniors a generous enough offer that they accept. That will likely depend on the common share price around the time of the offer.

If such an offer were to happen today, and if Treasury uses the same playbook that they did with Citi (who offered their preferred shareholders a conversion to common to increase tangible common equity, equivalent to CET1 now) then it would be around 3x the current market rate. That's roughly 3:1 right now based on today's closing prices, so the offer would be 9 shares of FNMA for every share of FNMAS. Applying that to all of the juniors means this conversion would create roughly 12B new shares.

As for a senior-to-common conversion, it will be at whatever rate Treasury wants it to be. If they take a 92% stake like with AIG, that would be 1.8B / 0.08 = 22.5B shares total, or 20.7B additional shares.

Combine the two and the share count will go up much higher because the juniors aren't likely to accept only 8% ownership, and if they do that would leave almost nothing left for the legacy common. The unadjusted-for-reverse-split share count could easily exceed 200B.