I can not tell if JPS or Common win - and if one actually somehow loses (win is to me a relative term - lose is like no more money than today or less)
your comment is text book correct
For those new common shares to be worth anything the juniors have to be worth full par due to how capital stacks work
so it is correct in a capital stack
but ---- we are in a conservatorship - under HERA where nothing is for sure
hhmmm
what if the GOV (Treasury - (tells) FHFA - ?) decides
F and F will not fail and are very needed but right now - we still need the GOV guarantee
We need that GOV guarantee until we get to half the capital we need which maybe as high as 240B
so there is no event - on action - where a capital stack (using your term for what I assume is the waterfall type logic of an 11 or such) - comes into play - IF = IF - the GOV/FHFA - whatever ---- keeps thins sort of status quo and runs the clock for 5 years to get to 120B
?
what is the NPV of JPS that are capped at 25 ---- if one assumes nothing happens for 5 years more ? and in such assumption we cut the dilution by 50% from whatever it might be with lower capital so final common price might be 25 or more ?
just thinking out loud Any event that slows things down AND allows F and F to accumulate capital is good for common and not so much for JPS ----- say if it extends beyond 18 months (an invented book mark time frame)
For those new common shares to be worth anything the juniors have to be worth full par due to how capital stacks work.
The share price of preferds and common are determined BY THE MARKET, not by the "capital stack". Exception: Liquidation. If you think this company is going to be liquidated, I suggest you buy stock in a company you think wont be going bankrupt or liquidated.
As I mentioned, the preferreds have 2 advantages, but several disadvantages over commons. Advantages: 1. Liquidation preference. Preferreds get paid before commons in the event of liquidation. Fannie is unlikely to be in liquidation, its a profitable company in the past, and likely the future.
2. Dividend preference "but only" in the current quarter. The preferreds are "non cumulative" preferreds, which means the preferreds can not get "retro" dividends. Disadvantages of preferreds: 1. Preferreds are non voting, commons elect a BOD to represent their interests, not the government, not the preferreds. We can/have/do "oust" board members who do not represent the interests of common shareholders.
2. There is a "cap" on dividends for the preferreds. There is no such maximum limit on dividends paid to common shareholders. As an example, if the government were forced to pay sharholders a sum of money, and the board decided that they were capitalized suffficiently, the board could declare a dividend of the preferreds, around 50 cents a share. But, the common shareholders could be paid, $1, 2 dollars, or even 10 dollars a share, or more. There is no "cap" on the dividends paid to commons. Before the conservatorship, the BOD approved "special" dividends..sharing additional profits with common shareholders. Preferreds did not get a special dividend. They just got their minimimum required payment. Thus, the preferreds do not participate, really, in growth, they just get their dividend.
3. Growth is limited on the preferreds. While the pps of preferreds can go at a premium to par, usally that only happens when the prefereds pay a high dividend rate..so people "pay" for those extra high dividends. But, the company can "pay off" the preferreds at par, if they so chose, kind of like retiring debt with a bond at a high interest rate that is redeemed (paid off). Companies almost always pay off "high interest rates" first.