Replies to post #605825 on Fannie Mae-No Politics (FNMA)

[JOoa0ky]

Plausible as this might sound, it is false. The best proof is in the form of the pref series FNMAO and FNMAP. They are $50-par, variable-rate prefs that currently trade around parity with the rest of the less liquid prefs (20% of par).

The kicker is that their dividends would be nearly zero if the pref divs were to be turned on right now. FNMAP's would be $0.02 per year and FNMAO's $0.01.

Why, then, do those series trade at the same level as the rest of the less liquid prefs? The only real value in preferred shares, compared to commons, is higher preference in liquidation and dividends. Since the dividends are nearly nothing for FNMAO and FNMAP, the liquidation preference must matter quite a bit in the eyes of the market.

If liquidation preference meant nothing then shouldn't these series be trading at almost zero? At best they would be out-of-the-money call options on future interest rates.

IMO it really doesn't matter what the market is offering them at...

The (3) possible scenarios for the prefs are as such:
I) Conversion to commons
II) Called at par
III) Left alone as is

Options I and II are fine but in the event of III, you may be in for a really rough ride. Compared to FNMAO and FNMAP, you could pay just a little bit more and at least be guaranteed a 4-8% div at par in the event that III materializes.

If I were to decide between FNMAO or FNMA, it would be FNMA every day.

FNMAT or FNMA I could go either way depending on which is on sale that particular day.

[FFFacts]

Plausible as this might sound, it is false. The best proof is in the form of the pref series FNMAO and FNMAP. They are $50-par, variable-rate prefs that currently trade around parity with the rest of the less liquid prefs (20% of par).

My context in liquidation preference was not related to the liquidity of purchase and sale of the preferred stock. It was that the companies fannie and freddie can't be liquidated in the traditional sense because of the underlying assets and size as may be typical in a bankruptcy filing. That is why a restructuring would be more likely than a chapter 7 bankruptcy liquidation.

The kicker is that their dividends would be nearly zero if the pref divs were to be turned on right now. FNMAP's would be $0.02 per year and FNMAO's $0.01.

2 yr cmt - .16 and 2yr cmt -0.18% respectively.


If liquidation preference meant nothing then shouldn't these series be trading at almost zero? At best they would be out-of-the-money call options on future interest rates.

What is the par value of the preferreds? What is the value of the preferreds in a restructuring? What is the value of commons in a restructuring? What are the assets and debts of fannie and freddie?

The prefs are always higher in the capital stack, restructuring or no.

Of course.

However, it is ironic that you use the word "restructuring" because it is the exact word that Calabria used to explain what has happened in past exits from conservatorships, and is also the word Ackman used when explaining why he bought prefs, and a restructuring is precisely when one would want to own shares higher in the capital structure.

There can be instances in which preferreds would not get full liquidation value but settled for a lower amount and kept commons alive.