Replies to post #491761 on Fannie Mae-No Politics (FNMA)

[Fuse78]

Amen...

[CatBirdSeat]

Good post. It just goes to show you that in any of the worse case scenarios we should already be sitting above $10 NOW!

Kill the JPS & Warrants, And $172 Easy...

[10bambam]

Thank you!
Go FnF!

[Barrario]

Thx

[camaro4me]

Using Fully Diluted numbers and not exercising warrants because they are illegal, merging, Fannie Freddie Ginnie into newco dropping the preferred shares, the common pps comes out to $172. With a 5% dividend that gives $8 share annually.

[kthomp19]

The methodology in your post is flawed, so I will save my critique of it for another post. Meanwhile, I address some of the other points in this post.

Here you can see that the average P/E in the same industry in January 2018 was 22.2. So my calculation with a P/E of 15.15 is rather low and the value of the company would be higher if I had chosen 22.2, namely 293 billion dollars:

Why choose insurance? Why not use the banking sector instead, which has an average P/E of around 13?

If Calabria were to reduce Fannie Mae's footprint by 20%, the value of our shares would fall by almost the same percentage. The same for 30%, and so on. This is because the capital requirements would also be lower.

Don't forget that Calabria will have to set the capital requirements early in the process, probably before he starts reducing the companies' footprint.

This example shows that in principle it is hardly worth mentioning whether one converts the JPS into common shares at the SPO price of $16.89 or not.

I agree, because the junior holders would never accept a conversion at that rate. Given the current FNMAS:FNMA ratio, they wouldn't convert at anything above $4.75 or so.

[kthomp19]

One flaw here is that you assume that the juniors would convert at a price that is calculated with no conversion. However, the conversion happens at the beginning, even before warrant exercise.

Right now, the FNMAS:FNMA ratio is around 5.5:1. Let's say half of the juniors convert at 6:1 (needs to be higher than the market ratio to get them to agree). Remember that this actually helps the companies recap because issuing new juniors (at a lower, market-based interest rate) adds directly to capital.

Fannie has $19B of juniors, so half convert. $19B / 2 / 25 * 6 = 2.28B shares. That's roughly twice the number of current outstanding common shares, so that alone cuts 2/3 off of your price.

Going through your same math, but with $9.5B in prefs instead of $19B and with 17.19B shares pre-equity raise (1.158B + 2.28B, then multiply by 5 after warrant exercise), gives a final price of $6.22. Quite a difference!


The other flaw, however, is more glaring. You calculate $16.89 as the secondary offering price, but what incentive would the new buyers have to pay anywhere near that much? In fact, they would push for the lowest price possible so that they own a bigger share of the companies. They certainly wouldn't pay more than $16.89, so that represents a ceiling. As in, that's the most optimistic it's possible to be.

I also think your $200B market cap for Fannie alone is rather high: the updated Moelis plan has a market cap of $235-267B, but that's for both companies combined. It's also possible the administration moves faster, meaning that even less than two years' of retained earnings go towards the recap. Another factor that could push the valuation lower is fear of reduced earnings due to Calabria and Mnuchin wanting a reduced company footprint. That would manifest itself in a lower P/E multiple.

All that together means that I find it very easy for your numbers to be lower, and nearly impossible for them to be higher.

[Halks1122]

Shew - that’s intense!

[action8101]

Another sticky

[bcde]

"In any case, Fannie Mae is worth 200 billion dollars if she is recapitalized and the expected profits remain the same. "

FD,

The cost of additional $100B fresh capital will affect the profits, depending how it is deployed.

One of the arguments used for lower capital standards is to reduce cost of guarantees.