Fannie Mae Preferred S (FNMAS)

[jmbell42]

Kylie,

Preferred shares are a hybrid instrument, having characteristics of a bond, i.e. a Redemption Value (or Face Value), and that of an equity security (i.e. some are convertible into common stock). In this instance, there is no conversion clause in the prospectus for the Preferred Securities (as of my reading of the FMCKL prospectus).

Thus, Preferred shares have the following pros: (1) they provide a dividend (in nominal circumstances). (2) they are senior to all other equity interests (i.e. we get paid first).

They also have the following major con: (1) Max value is the Redemption value (i.e. they do not participate in the companies growth outside of the dividends) and (2) they can be "called" or redeemed by the company for face value.

These share a similar risk characteristic to convertible bonds, but with lower priority (someone else who is experienced in distressed debt can chime in here to clarify if I'm wrong).

Thus, preferred shares are typically a safer bet in special situations, because they have a lower risk profile (i.e. we're paid first) vs common equity.

Basically, at current prices, the "Market" or what is supposed to approximate it on the pink sheets, is saying that the preferred classes have a roughly 20% shot of being fully redeemed, or partially redeemed at 20% of FV (RV).

I have no clear way to value the commons at this point, since FnF are not really going concerns (in the classical, easy to understand sense... no flame posts please), and as others have stated, the USG is sitting on a ton of warrants for common stock.

Since I don't have a clear view of how to value the commons, I went with the more conservative distressed situation bet and invested with preferred shares.

Thus, to my mind, the market is showing exactly what it should: Preferreds are the safer bet in special situations and are valued higher in accordance with this.

Best,

Jared