Replies to post #605920 on Fannie Mae-No Politics (FNMA)

[kthomp19]

My context in liquidation preference was not related to the liquidity of purchase and sale of the preferred stock.

Neither was mine.

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.

I agree.

My point was that even outside of a liquidation, the liquidation preference of the prefs matters and has value. Quite a bit of it, in fact, given where the near-zero-div prefs trade.

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?

1) Which series?
2) That's the $64,000 question. I believe it is very high, because the prefs must be dealt with (most likely exchanged for commons) to achieve a recap. A re-IPO with this huge block of prefs in the capital structure is much more difficult than if they were exchanged for commons.
3) Generally very little compared to the classes above them. Liquidation preference matters a great deal in a restructuring, and it appears that a restructuring of FnF's capital structure is exactly what is going to happen.
4) Each are something on the order of $5.6T (for FnF combined). Their combined capital of $23B or so is not much more than a rounding error.

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

Yes. But even then, in those scenarios, the prefs generally outperform the commons by a large amount. The commons could go to $0.01 and technically be "alive".

Also, the only realistic way that the prefs take a haircut is in conjunction with an exchange for commons. In that case they would have a direct incentive for the commons to still be alive afterwards.