Replies to post #634114 on Fannie Mae-No Politics (FNMA)

[JosephS]

It will not take years if they don't want it to.

AIG was done in about 18 months. Not a long time to sell a huge amount of warrant exercised shares and Sr. Preferred shares converted into common.

Thou doth protest in such narrow terms. If a cramdown happens, I will not feel sorry about it because of all the posts on here.

This could happen in days with cramdown.

Then sell off shares in months.

Not difficult if you do it this way imo.

[TRCPA]

I agree 100%. The wild card, of course, is the Supreme Court.

Otherwise, I foresee retained earnings matching up with close to 2X in capital raise for a few years, with prices rising on each new capital raise as risk lessens and demand increases
.....assuming healthy housing markets during the period. (Fed chair has signalled near 0% fed rates continuing during that time frame).

I foresee consent decree in late spring/early summer 2021 (based on SCOTUS decision/1st round of capital raise). 1st capital raise might be a private offering if interested parties commit, and receive better offer than future public offerings, as they are taking the greater risk that follow up will continue.

[PennMilitia]

New Cap Rule is a Fairy Tail Pipe Dream !

This is why I call the new Cap Rule a Pipe Dream
because it is almost impossible to raise that type
of cash. Maybe in 10 to 20 years they can do it.

The whole thing is ridiculous.

[nagoya1]

To clarify - up to know, WE don't know much about the FNMA capital raise.

Stating otherwise is DELUSIONAL.

It doesn't matter much what MC or Munchkin says until SCOTUS.

FNMA

[Louie_Louie]

Exactly right GAK.
jps posting on here about a massive dilutive conversion slam down do not know what they are talking about. Even those that are advocating a 1 year time length for cap raise are not seeing the big picture. The only way they do a one or two time shot next year is if the twins are awarded enough through the court cases to meet the mid to higher cap number. If any reward still means a large required raise then we are on a 2-3 year road to the 254 billion number. That does not bode well for jps because they will be at a stand still with no dividends until we get higher capital.

Jps will not be offered the unlimited growth potential of a conversion without paying a price, so the chances are far greater that if converted they will pay a premium of their jps position to attain that growth up shot.

[kthomp19]

Long, slow process for Capital Raise.

It is going to take years to build capital, even CET1 capital. Those who imagine it will be done within a month or two of consent decrees are dilusional

It appears that you are guilty of the False Dilemma fallacy here, acting as if the only two possibilities are a long, drawn-out capital raise process and a humongous raise in the next few months.

An AIG-style series of raises in a 18-month period (from mid-2021 to the end of 2022) is between the two extremes, and seems more likely to me than either of them.

1. The combined TOTAL of IPO's this year (2020) is $95B, last year $84B. That is the total for ALL companies, not just one, and most of them were growth companies, not insurance companies like FnF. It will take FnF years to raise the capital they need.

This only argues for FnF being able to raise more capital quickly. The types of investors that prefer safe, insurance/utility-like stocks haven't had the kind of opportunity FnF present for a long time. FnF won't be competing with much of that $95B or $84B.

2. The largest single US IPO on record is Alibaba at $22B

Rather irrelevant because FnF's share offering won't be an IPO.

3. The largest worldwide IPO was Petrobas, most of which was not actually cash. The cash portion was only $36B

This is a better parallel, but it also argues for FnF junior-to-common conversion offer being more likely because it adds $33B to CET1 capital without costing anyone any cash.

4. AIG went to market 6 times to raise their cash. Converting Pfds did not happen until they went to market first. They went to market in 2010, but did not convert legacy Pfds until 2011.

The first article mentions a mandatory conversion, which FnF juniors don't have. That makes the second sentence inapposite.

AIG's capital raises were not spaced very far apart in terms of time. FnF following that example would mean more dilution for the commons because there would be less time for retained earnings.

5. I expect FnF to follow suit. Since it will take them a few years to raise core capital, they will not be in a rush to convert Pfds.

Quite the opposite: there is no reason to delay a conversion offer if one is going to happen. It makes the capital raises easier to conduct by increasing the economic value of the new shares, and it adds $33B to CET1 capital as the holders take up the offer, both allowing Calabria to claim a more immediate victory and reduce the pressure on future capital raises. All your delayed conversion idea does is cause the raises to be more dilutive and at lower prices due to participants in the first raise not knowing whether the juniors will be offered a conversion later or at what rate.




I commend the effort here, but your post doesn't come close to proving that FnF will drag out the capital raising process or that a junior-to-common conversion will be delayed.

[kthomp19]

Another thing you are missing, from the standpoint of deciding whether to own the juniors or commons right now, is that the only thing that really matters is what price the first common share raise is priced at. Later raises being at higher prices doesn't affect the allocation decision today.

For those new common shares to be worth anything the juniors have to be worth full par due to how capital stacks work. Then, even if the juniors are not offered a conversion, they could always sell their shares at par and buy commons around the re-IPO price.

Right now FNMAS trades at around 4.1 times FNMA ($8.52 / $2.04). If FNMAS goes to par at the time of the first capital raise (and it could go much higher if divs are turned back on; where else can you get 7.75%?), the re-IPO price would have to be higher than $5.99 for the commons to be a better bet from here.

If you use a less liquid series (which should still trade at par) like FNMAM (last trade: $12.90) instead, the re-IPO would have to be priced higher than $7.91 for the commons to win.

Since I own nearly all illiquid prefs, for me to own commons instead I would have to think the commons will be worth more than $8 at the time of the first capital raise. Anything less and I make more money by holding my prefs now and converting in the marketplace later.

1) The shares only trade at $2 right now, give or take. Re-IPOs are generally done at a discount to market prices to give investors an incentive to participate. That means the commons would have to at least quadruple from here before the first capital raise to win, and that's a tall, tall order. Even the end of the NWS leaves future dilution uncertain.
2) While the shares could rise between now and then, they could also fall. In the past plenty of people opined that the shares would jump to $10 upon the NWS ending, but that was "only" a triple from the prices at the time. A similar triple from here, with no other big positive catalysts on the horizon (SPSPA amendment means all the lawsuits would be mooted) would leave the share price at $6 with no reason to go any higher.
3) There's just too much capital to raise, and too little FnF market cap, for the existing commons to be worth more than $14.4B ($8 times 1.8B shares) total. That was the whole purpose of my framework post, which topped out at a common price of just over $8 (on a $300B market cap!) and still had the prefs outperforming.





Also consider the fact that investors in the first capital raise have every reason to insist that the juniors be converted first because it makes their shares more valuable (better position in the capital stack), and neither FHFA nor FnF have a reason to tell them no. Not doing the conversion first means the first re-IPO price will be even lower, making it harder to hit $8.

If the prefs were to stay around 25-30% of par and the commons were to drop to $1.00-1.20, I would sell most of my prefs to buy commons. It's not that I hate the commons and wouldn't ever buy them, it's that I don't think they have enough upside at current prices to justify owning them.

I even tweeted my chart showing the implied common price over time (where the commons would be if the juniors hit par and the commons gain the same percentage), and since December 2017 it has hovered around the $6-8 range. Given the prefs' similar upside and lower downside from current prices, I believe my decision is clear.

[TRCPA]

Great points all, and you arent missing anything important that I can see.

The answers to the questions that have been bandied about here for years are coming soon.