Replies to post #508087 on Fannie Mae-No Politics (FNMA)

[Brooge warrants cancelled]

another educated poster

[kthomp19]

To my knowledge all FnF prefs are NON-Cumulative preferred stock, NOT Convertible preferred stock

This is correct. Convertible preferred shares can convert to commons either mandatorily at a certain event, or at the option of the shareholder. FnF's preferred shares have neither of these features.

But that doesn't mean one of those features could not be added later, see below.

how would prefs convert to common?

By FHFA and 2/3 of the holders of each series agreeing to amend the contracts. It's on page A-6 of the FNMAS circular you linked to, in section 7(c):

(c)Except as set forth in paragraph (b) of this Section 7, the terms of this Certificate or the Series S Preferred Stock may be amended, altered, supplemented, or repealed only with the consent of the Holders of at least two-thirds of the shares of Series S Preferred Stock then outstanding, given in person or by proxy, either in writing or at a meeting of stockholders at which the Holders of Series S Preferred Stock shall vote separately as a class. On matters requiring their consent, Holders of Series S Preferred Stock will be entitled to one vote per share.

Section 7(b) talks about how Fannie Mae can amend the contract unilaterally only:

(1) to cure any ambiguity, or to cure, correct or supplement any provision contained in this Certificate of Designation that may be defective or inconsistent with any other provision herein or (2) to make any other provision with respect to matters or questions arising with respect to the Series S Preferred Stock that is not inconsistent with the provisions of this Certificate of Designation so long as such action does not materially and adversely affect the interests of the Holders of Series S Preferred Stock

This rules out a forced conversion on unfavorable terms to the pref holders.

This language is in all of the pref circulars, so a conversion would have to be voted on by the holders of every series separately. However, FHFA and Treasury are smart enough that they wouldn't bother making an offer unless it was very attractive and guaranteed to be accepted by all the series. This would most likely be done in conjunction with a settlement to nearly all of the existing lawsuits, which forms the basis of FHFA and Treasury's incentive to do so.

All FHFA has to do is offer to amend the circulars to add a section saying something like "on June 1, 2019 each Series S share will be converted into 7 shares of common stock". Simple, really.

Regardless of what else you might hear, a conversion helps almost everyone involved.

1) Junior pref holders get upside past par, and more money overall
2) FHFA and Treasury get out from under the lawsuits, avoiding the risk of an adverse ruling
3) The companies themselves make room in the capital structure to issue new non-cumulative prefs that count towards core capital
4) $2B (in the case of a full conversion; $1B for a 50% conversion) worth of earnings can be paid to commons as a dividend, or used otherwise, instead of paying dividends to the current non-cumulative prefs

The current common shareholders are the only ones adversely affected by this, and they won't be able to protest as long as this conversion happens before the companies are released.