Replies to post #607723 on Fannie Mae-No Politics (FNMA)

[Commons_Cancelled]

It's a shame that article doesn't get into Capital Structure, which is the key reason most intelligent GSE investors own Jr. Preferreds rather than Commons.

Seeing as how there's a recapitalization on the horizon, Capital Structure is a very important FNMA Fact to be mindful of. Owning Common equity is a sure way to get burned assuming the terms aren't favorable to existing Commons (and they will have ZERO say in any of this since they have no rights while the GSEs are in Conservatorship).

Owning Jr. Preferreds is a way of saying: "Hey, I see there's a recapitalization coming. The GSEs are going to need to flatten the Capital Structure in order to raise ~$100B in capital. In order to flatten the structure, Jr. Preferreds will need to be dealt with. And since the GSEs don't have much capital, the only way to deal with Jr. Preferreds would be to offer them a juicy proposal and have them convert to Commons."

Hopefully that makes sense. That's the thesis and it's not changing unless the Admin changes tunes. In which case, we're all likely getting Cancelled :-(

[Guido2]

Sticky please.

[chessmaster315]

Courts treat Preferreds with disdain: Delaware Law Journal

In relevant part:

Dividends promised to preferred stock can be retracted, and the preferred generally cannot force repayment of the principal in the event that a covenant has been breached.

(In the case of FNMAS, these preferreds are non cumulative preferred, so that the preferreds dividend preference is limited to the current quarter...no retro divies for preferred)

Now, in regard to the preferreds "favorable conversion hypotheisis", suggesting that the common shareholders are going to be giving Preferreds buckets of money by offering them a conversion to commons at a highly favorable (for preferreds!) conversion rate:
Nope:

It is
no wonder, then, that investors have lost interest in preferred stock; if one must rely on covenants, better that they be included in an unalterable, legally enforceable debt contract. Preferred stock cannot survive if the board, acting on behalf of the common, can readily expropriate much or all of its value.

The Corporate Decisional Calculus
Corporate decision-makers (e.g., the officers and/or the board) can be induced to take heed of investors' interests primarily by three familiar mechanisms: the investors' power to replace the decision-makers, the alignment of interests between investors and the decision-makers, and the firm's capital market reputation. In standard governance arrangements, these inducement mechanisms are over-allocated to the common, mildly under-allocated to debt, and allocated hardly at all to the preferred. Alignment of
interests almost always redounds to the common's benefit, as directors and managers frequently are paid in part with common equity interests and essentially never with preferred. Thus, common stockholders can confidently anticipate that the board will at least attempt to increase the share price of the common. In most corporations, the common equity also elects the board, and, as noted above, they enjoy the protections of fiduciary duties as against the preferred. Creditors have no direct representation on the board, but they hold the greatest leverage in terms of capital market reputation. Firms more frequently need to roll over their debt than raise new equity;if they wish to secure low-cost financing, they need to establish a reputation in the debt markets for good capital stewardship.
Preferred stock, by contrast, has little input into or sway over firm policy.