Here are some great discussion threads on investment strategy and general knowledge of GSE preferreds.
strategy for investment: invest in the preferreds with the best possible return and moderate to large volume of trade.
- General knowledge of Preferred stock from investopedia
- $FNMA & $FMCC – Best Execution Strategy & a Crash Course in Capital Structure
- Beginngers guide to $FNMA & $FMCC. **Read this before asking stupid questions**
- Return of investment table of PFDs
- Good post: Is there a reason why the 50s, generally speaking, have better par/price ratios than the 25s? Is there a general finance or investing principle at work or is this a coincidence / seeing patterns where there are none?[–]NOVACPA 10 months ago
Finance principal and maybe a legal theory.
Generally, the $50’s have a lower interest rate as compared to the $25s. The $50s average fixed dividend is 5.61%. The $25s average fixed dividend is 6.54%. Generally speaking, but a 0.93% difference in a low interest environment is big.
I won’t get into the specifics of the pricing (but I’ll hit a general example). Using the Ryan Index, the current weighted duration of 2 to 30 year Treasuries is 7.386. What does that mean? For every 1% move up in interest rates, bond prices fall by 7.386%. Preferred securities are priced similar to bonds. Therefore, a 1% difference in average dividend rates would explain most of the pricing difference.
The legal theory is that preferred securities previous dividends would be treated as “a return of capital”. Older issuances (mostly the $50s) would obviously be impacted more. Therefore, if $13 dollars in dividends were paid out, the par value may actually only be $37, not $50. IANAL and I have read this once on a thread over at theCornerOfBerkshireAndHathaway.com… I cannot find any legal precedent that supports that statement. However, its an uncertainty that some investors are pricing in.
Therefore, we can say a bulk of the pricing difference is the duration risk and some is the legal uncertainty around if the dividends are treated as “return of capital”.
Does that make sense?Thank you very much. The legal argument made sense, I will have to read more about bonds but I definitely got the gist of things, so thank you again. - Further discussion on FNMFO: [–]throw-a-way_123 3 points 10 months ago*
I have a bunch of [FNMFO], should I convert it? What are the pros and cons?
Ok… I chimed in about a month ago with my two cents:
It all comes down to this:
FNMFO is also convertible into 1060.3329 common shares making it the only one of the Fannie and Freddie preferreds that can be converted to common shares.
So, break-even at $24k is ~$23/share common and break-even at $100k is ~$95/share of common.
You have three overly optimistic outcomes that require praying to gods and several really, really bad ones:
1 – hold the preferred shares and pray they get back to their $100k worth (currently trading at $26k), enjoy the 5% on $100k (effectively 20% interest) you were promised; I’ve asked the question multiple times: “is anyone with interest/dividend issuing preferred shares receiving their interest/dividend?” No answers; so, you’re on your own here
2 – buy the discounted preferred shares and immediately liquidate to OTCMKTS common stock (I guess it’s the same since preferred is also listed on OTCMKTS); pray Trump’s Treasury Secretary sweet talks the justice department into prying Treasury’s hands off FNMA and refloat on a listed exchange (will need to be underwritten by someone very, very, very big). Additionally, you need to pray that the refloat brings $26 per share to get your preferred share money back; remember, everyone and their brother will be doing the same thing with their preferred shares, thus 26 million additional shares (25000 * 1060 or ~3% of the common issuance just for preferred FNMFO shares) will be diluting the common shares. Anything above $26/share common is sweet, sweet victory.
3 – hang on to your preferred shares until a refloat happens (again, nobody can tell me if the preferred shares are seeing interest/dividends issued to the share holders). Decide if 20% on $100k is worth more than whatever 1060 shares of common will bring on the market.
The risk is that you turn your $26k (assuming you buy today) for a single preferred share into $2k, which is what it was worth after the Treasury took control and started sweeping profits. Remember, the liquidity for these preferred shares is super thin…. if they’re not receiving interest/distributions, they’re not worth very much at all.
There’s also the possibility the FNMFO will be force liquidated at “market value” (whatever the fuck that turns out to be) to make the refloat happen (no free rides on the Trump marry-go-round).
Given the Trump administration’s vitriolic tendencies, I would not put it past him or his treasury secretary to just throw FNMA, et. al. in the trash heap (remember, by decree, the treasury only has to pay out 15 cents per share) and transfer all mortgages up to a newly established GSE just to ditch all the bail-out baggage and tell the Justice Dept. to go fuck itself. If you don’t think that can happen, you need to go back and review what was done to the GM shareholders.
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[–]NOVACPAis a dirty liar 2 points 10 months ago
You aren’t wrong on your assumptions, but I’d like to add some context.
FNMFO…
You’d want to hold the the preferred until the common share price is above $95 before there is any consideration of conversion.
When you convert at $95+ then you have a basis of about $23. Until then, you are leaving money on the table.
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[–][deleted] 1 point 10 months ago*
If you buy the FNMFO at $26k (a significant discount from their original $100k price), break even is at $26/share common assuming a 1060 sell-in to common (minus trading friction).
If the common goes to $26 per share or more, more than likely the preferred will revalue to $100k. What’s unclear is if the preferred shares will pay 5.375% on their original $100k price or if they’ll pay it at market value (currently $26k). Furthermore nobody has indicated if the preferred shares are receiving interest/distributions.
If FNMFO revalues to $100k, you just 4x’ed your money and now get 5% on that 4x’ed money (or about 20% interest; that’s some Warren Buffett style compounding right there). I’d kill to find an instrument that I could hold and earn 20% interest indefinitely…. and at that point, the common stock quick kill liquidation can go fuck itself even if it goes above $95/share (contingent upon that GSE’s underlying fundamentals and debt risk).
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[–]NOVACPA 3 points 10 months ago
It would pay dividends on the $100,000 value should dividends be reinstated. Its in the contract.
If it went passed ~$95 a share, there may be a reason to convert. You’d receive $5,375 per year on FMNFO. At historical dividend rates on the common between 2.5% and 3.6% (call it 3%), if the stock was over $168, you’d receive the same dividend of $5,375.
Just something to consider.
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[–]AutoModeratorI’ve come to terminate your stupid asses[M] 1 point 10 months ago
Isn’t all significance psychological?
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[+][deleted] 10 months ago (7 children)
[–]MiCoHEART 1 point 10 months ago
Your assumption about the conversion relies on the preferred FNMFO staying below par while the common goes above 24. This is optimistic at best. Any scenario where commons go to 24 or higher will have FNMFO go up too. FNMFO is capped though while FNMA can shoot up to anywhere. Realistically this means the conversions only becomes value added around $100/share if FNMFO returns to par. - From Perry’s legal document: P259 – This Preferred Stock and common stock, which was issued prior to the issuance of the Government Stock, is held by private investors such as pension funds, community banks, insurance companies, and individual investors. As of March 31, 2013, the Companies’ outstanding Preferred Stock had an aggregate liquidation preference of $33 billion. Each class of Preferred Stock has its own contractual dividend rate and liquidation value.
Prior to September 8, 2008, each series of Fannie Mae Preferred Stock ranked on
a parity with all other issued and outstanding series of Fannie Mae Preferred Stock as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of Fannie Mae, and each series of Freddie Mac Preferred Stock ranked on a parity with all other issued and outstanding series of Freddie Mac Preferred Stock as to the payment of dividends and the distribution of assets upon dissolution, liquidation, or winding up of Freddie Mac. In other words, each series of Fannie Mae and Freddie Mac Preferred Stock carried equal contractual rights to with regards to the dividends, and each series of Fannie Mae and Freddie Mac Preferred Stock carried equal liquidation preferences (or their respective pro rata portions thereof) upon
dissolution, liquidation, or winding up of Fannie Mae and Freddie Mac. Prior to September 6, 2008, Fannie Mae and Freddie Mac each regularly declared and paid dividends on each series of their respective Preferred Stock. - There are several exceptions to the norm preferred FMCC stocks. The exceptions trade under the tickers FREJP, FREJN, FREJO, and FREGP. These Freddie Mac preferred stocks were never listed on the NYSE (or any other exchange until recently) and they were privately placed with investors. These investors chose to buy and hold the securities to benefit from the perpetual nature of their dividends, which they never expected to end.
- In-depth study of FNMFO from Seeking alpha
- The preferred (in general) will trade discounted to par until the entities are fully capitalized and related from conservatorship.
After that, then the preferred will trade on fundamentals (credit risk, interest rate risk, etc) - GSE warrants
- excel list of preferred stocks
