Fannie Mae-No Politics (FNMA)

[obiterdictum]

The distinction of two types is made as noted below and the allusion to a specification (participation threshold) is given but no clear formulation or details are provided except to say that their will be a rights offering and would consider that for common shareholders but without commitment to do so. He assumes that readers know what a right offering or issue is and what participation and non-participation in such an offering means.

Participating (Junior) Preferred are described in this way in the Discussion Terms Sheet:

D. Purchase Price and Rights Offering
The purchase price for the Acquired Assets would be paid in kind
by the exchange and cancellation of Preferred Stock from
participating holders (“New Owners”). The amount of Restricted
Capital acquired by the NewCos would be based on the
liquidation preference of Preferred Stock exchanged.1

In addition to the Restricted Capital acquired in the purchase, the
New Owners would fund the NewCos with new cash equity in an
amount equal to 50% of the amount of Restricted Cash acquired.
The New Owners’ investment would be made in the form of a
fully-underwritten offering with transferable rights. All initial
equity in the NewCos would be pari passu common stock.2

A minimum participation threshold for owners of Preferred Stock
would be set to ensure success. Fairholme believes that market
support will be very strong if the Transaction could be agreed and
completed in the near term.
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1
The amount of Restricted Capital available at the Purchasers would be equal to (x) the
liquidation preference of the preferred stock held by participating New Owners in the
applicable Enterprise plus (y) any unpaid dividends on that preferred stock from the first
date the applicable Enterprise declared excess dividends to the United States Treasury
after the August 2012 Net Worth Sweep.
2
Although the Purchasers would be prohibited from paying dividends attributable to
Restricted Capital during the Restricted Period, they would be permitted to pay dividends
to the extent of earnings attributable to the new cash equity investment. In other words,
since the amount of Restricted Capital is two times the amount of new cash investment,
each Purchaser would be permitted to pay out dividends equal to one-third of its earnings
during the Restricted Period.

and -

E. Retained Assets
A premise of the Transaction is the repayment of the U.S.
Treasury’s Senior Preferred Stock investment in full with a fair
profit, which can be accomplished by leaving behind the Legacy
Assets in designated successor companies (“Run-Off
Companies”). The Run-Off Companies could then be resolved in
a value-maximizing, orderly manner under the supervision of the
Federal Housing Finance Agency (“FHFA”). To the extent
resolution proceeds exceed the amount due to the U.S. Treasury
on its Senior Preferred Stock investment, distributions would be
made in order of priority to non-participating preferred
stockholders and common stockholders (including the warrant
held by the U.S. Treasury for the purchase of a 79.9% common
equity interest in each Enterprise). The NewCos believe this
approach would be fair to all stakeholders and provide the clearest
signal to the market that the NewCos would be purely private
companies.

These are the only references to the two types.

Yes, when the preferred are participating in the rights offering by purchasing shares at some price, the issue is in common stock of the new companies as explained above. If preferred stockholders do not participate, they will not have any common stock in the new companies and will stay in with the the run- off companies above the common shareholders and in line for dividends, distributions and liquidation proceeds.

No, I do not get that they will apply dividends immediately. Berkowitz assumes the US Treasury will accept the dividends and net worth sweep paid in already as compensation for the 187 billion and gives no specific amount for the fair profit promised in addition. The (non-participation) juniors will remain above the common shareholder in the liquidation preference by law and agreement.