"He proposed an agreement letter between the U.S. Department of the Treasury and the Federal Housing Finance Agency (FHFA) to forgive the $193 billion drawn by the government-sponsored enterprises (GSEs). Ackman argues the amount is smaller than the $310 billion in dividends the companies have paid since entering conservatorship in 2008. The letter is intended to address investors' concerns that the Trump administration could unilaterally convert the GSEs' senior preferred stock into common stock, massively diluting shareholders."
"A Deutsche Bank report assigned a 20% probability to such a move. KBW analysts agree with Ackman that such a conversion could prompt new litigation and delay the privatization process. But they are less convinced that it would affect valuations once the companies are privatized. We believe that many institutional investors are expecting a preferred to common conversion if there were to be a privatization, they wrote."
"Ackman said his firm owns 210 million shares across the two enterprises, with 10% being preferred shares. According to KBW, if capital rules are not changed, current normalized earnings imply returns on equity of 8.3% for Fannie and 9.3% for Freddie. The analysts agree with Ackman that a 2.5% capital level would be appropriate, compared with the current 4.5% requirement."
The proposal calls for the Treasury and FHFA to forgive $193 billion drawn by the GSEs, citing it as smaller than $310 billion in dividends paid since conservatorship. The plan would have the Treasury exercise warrants to obtain 79.9% of common stock and relist the firms on the NYSE. Analysts warn that converting senior preferred into common could spur litigation and delay privatization, though impact on long-term valuations is debated. KBW values the GSEs at $344 billion if preferred is forgiven and favors a 2.5% capital level versus the current 4.5%.
Read at www.housingwire.com
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