This is a follow up on my recent post, Fannie and Freddie: The NWS and the Implied Covenant of Good Faith and Fair Dealing. Private vs Public Notice that the joint venture agreement in Oxbow, that was the subject of the Delaware Supreme Court’s analysis of Crestview’s reasonable investment expectations, was a highly negotiated agreement specific to Crestview’s investment in Oxbow. Oxbow did not take a standard agreement with respect to a public security investment, as is the case with the GSE junior preferred stockholders with respect to their preferred stock certificates of designations. Oxbow negotiated a bespoke agreement for its own one-off private investment.
Walk with me here in general principles. The details can be refined.
Assume 10 billion earnings / year for Freddie. With warrants, there are around 3 billion shares, fully diluted. EPS = 3.33 With a ten multiple that’s 33 per share, give or take. Government owns 80% or 2.4 billion shares in warrants. That’s 79 billion with sale of warrants IF there were no capital raise.
Obviously there will be capital raise. If capital raise is 40 billion for Freddie, investment banks will want to put up the 40 billion at the lowest share price possible in order to own greater percentage of GSEs. If the share price were driven down to 1 dollar / share, there’d be 43 billion total shares after IPO. EPS would be 10 bln / 43 bln = 23 cents per share. That translates to an IPO multiple of only 4.3 x earnings to get to 1 dollar per share. The commons could run up to 10x earnings, or to 2.3 dollars per share. Government could net 2.4 bln shares x 2.3 = 5.52 billion dollars. Not a great sweetener.
A better deal for government is not to dilute existing shares + warrants any further if possible. But yet they need capital raise. So, let’s go back to the 79 billion value for warrants scenario (based upon $33 per share x 2.4 billion shares of warrants). If government sacrifices 50% of its warrants back to the gses for a 40 billion capital raise, it can walk away with nearly 40 billion from their remaining 1.2 billion shares, instead of 5.52 billion dollars by not playing hard ball with the banks and taking only 2.3 dollars per share for all 2.4 billion shares. By sacrificing percentage of warrants tsy can maintain pps integrity by avoiding unnecessary dilution.
In sum, doesn’t treasury have leverage if they care to engage banks on capital raise? Can’t Tsy go this alone? (Obviously jr pfds and maybe even SPS will come into play), but is the general concept sensible?
ROLG , when do you estimate that the Collins case will get a final court decision ? And do you think that it will affect the course of the case in Judge Lamberth court ?
IMO, The immediate concern should be on the next NWS. When does the window of opportunity for the government end?? It's been a month since earning were reported. If they don't declare for this quarter, they can't for subsequent quarters. Again, just my opinion.
ROLG,
Walk with me here in general principles. The details can be refined.
Assume 10 billion earnings / year for Freddie. With warrants, there are around 3 billion shares, fully diluted. EPS = 3.33 With a ten multiple that’s 33 per share, give or take. Government owns 80% or 2.4 billion shares in warrants. That’s 79 billion with sale of warrants IF there were no capital raise.
Obviously there will be capital raise. If capital raise is 40 billion for Freddie, investment banks will want to put up the 40 billion at the lowest share price possible in order to own greater percentage of GSEs. If the share price were driven down to 1 dollar / share, there’d be 43 billion total shares after IPO. EPS would be 10 bln / 43 bln = 23 cents per share. That translates to an IPO multiple of only 4.3 x earnings to get to 1 dollar per share. The commons could run up to 10x earnings, or to 2.3 dollars per share. Government could net 2.4 bln shares x 2.3 = 5.52 billion dollars. Not a great sweetener.
A better deal for government is not to dilute existing shares + warrants any further if possible. But yet they need capital raise. So, let’s go back to the 79 billion value for warrants scenario (based upon $33 per share x 2.4 billion shares of warrants). If government sacrifices 50% of its warrants back to the gses for a 40 billion capital raise, it can walk away with nearly 40 billion from their remaining 1.2 billion shares, instead of 5.52 billion dollars by not playing hard ball with the banks and taking only 2.3 dollars per share for all 2.4 billion shares. By sacrificing percentage of warrants tsy can maintain pps integrity by avoiding unnecessary dilution.
In sum, doesn’t treasury have leverage if they care to engage banks on capital raise? Can’t Tsy go this alone? (Obviously jr pfds and maybe even SPS will come into play), but is the general concept sensible?
ROLG , when do you estimate that the Collins case will get a final court decision ? And do you think that it will affect the course of the case in Judge Lamberth court ?
IMO, The immediate concern should be on the next NWS. When does the window of opportunity for the government end?? It's been a month since earning were reported. If they don't declare for this quarter, they can't for subsequent quarters. Again, just my opinion.