Replies to post #689586 on Fannie Mae-No Politics (FNMA)

[Golfbum22]

Please read

Jps are non convertible shares

It says it in black and white

Glta

[stoxjock]

loading up on Prefs and commons.. Some breaking news???

[kthomp19]

The prefs will most likely not have their divs restarted... The most likely scenario would be to convert to commons near par value. The amount of exchange is up in the wind... Anyone's guess is as good as mine.

The main reason to offer the juniors a conversion is to facilitate the capital raise. And it would certainly do so; the new common buyers would have $33B of liquidation preference and $2B of dividend preference removed from in front of their new shares if the juniors are offered a conversion.

When capital is raised, common (and thus junior pref) dividends will have to be turned on. FnF are not growth businesses; new buyers will insist on immediate dividends.

IMO, the conversion is very likely because it lessens the amount the fork lift of a capital raise has to do.

At the very least it allows some of the capital raise to be in preferred shares. $33B, carrying $2B/yr in dividend obligations, is a pretty significant sum.

When a company issues pref shares, they pocket the money and then record a liability for the exact amount they issued. This is a networth neutral transaction. Unfortunately due to the NWS, the liability is still there but the asset is now gone. Therefore keeping the prefs around right now is contributing to a 30 something billion deficit.

Not really. The money received from selling preferred stock goes in the equity section of the balance sheet, not the liability section. The juniors do contribute $33B towards core capital right now.

If whatever capital rule that rules the day has a CET1 requirement, like Calabria's did, then a conversion really would add $33B to that amount.

Of course they could always opt to not convert the prefs and leave the deficit but you would have to IPO an additional 30B+ to make up for it. The conversion is just 'easier' IMO.

Even though a junior-to-common conversion wouldn't add to core capital, it would reduce the size of the common capital raise because it would allow for new non-cumulative preferred shares to be sold.

Those who whine aboue the conversion don't seem to realize that one not happening increases dilution too.

Prior to SCOTUS the price of the prefs were not worth the risk IMO because it would be like a 4x return... but right now with them floating around 1.50 each its about a 16x return. Its currently a better 'value' at the moment.

The prefs are and have always been the better value once you realize how much dilution is coming even in the best case scenarios. The prefs' recent underperformance to the downside will have no effect at all on where the prices end up, in both an absolute and relative sense. The commons and prefs have each had periods of outperformance versus the other in the past and none of those had any significance; neither does this one.