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Rumors of Deals - Freddie POOPS
When I got the draft prospectus on this deal I just laughed. No one would buy new Freddie Pref. The idea of a no-dividend deal seemed nutty. So I called someone on the deal team to get the scoop. After going through the thinking behind it, the proposal makes a lot of sense.
This transaction idea comes from the deep thinkers at Freddie and FHFA. They want to address two important issues:
-They want to retire as much of the old Pref as possible. The Pref got screwed in the receivership structure. The Junior Subordinated debt was bought in recently at par+. The sub debt is ‘money good’ while the Pref is worthless. No bankruptcy court would have allowed that treatment. The concern was that someday someone would sue in Federal Court and the precedents of Equity Subordination would prevail. If the pref is worthless then the bonds are not money good either.
- The receivership structure requires Treasury to provide additional capital to the GSE’s if their net worth falls below zero. Internally this is referred to as “Drip Equity”. The Agencies are currently losing about $10 billion per month. They are going to have to go to Congress for more money and they want to put that off for as long as possible.
The new POOP securities were designed to address both of these problems. There is absolutely no economic substance to the transaction but it still achieves the objectives. The deal is designed to create swap fodder for the old Pref.
The $25 new POOP stock is structured as an exchange offer. A buyer could ‘buy’ a POOP and pay for it with an equal dollar value of old junk Pref. To sweeten the deal the participants got a Warrant. The Warrant was essentially a subordinated IOU from Freddie to pay $1.00 in five years.
What this means is that if one was a distressed holder of the old Pref they could now get new Pref and a dollar. The POOP is post conservatorship, it therefore has no legal standing. But neither did the old pref. A “nothing for nothing swap” was how it was being pitched. Given that the old Pref is trading at +/-$2.00 this looks like a 50% return. On a conference call one holder said, “I’ll take anything I can get”.
For Freddie this exchange gets rid of the old, troublesome Pref. It also creates some very favorable accounting treatment. Apparently they were going to book the retirement of old Pref as a “Gain From Defeasance”. Even better the new POOP was going on the books as 'equity' at the full $25 face value. If the deal were fully subscribed it would have resulted in an increase in the equity line of $50 billion! The guys at Freddie thought that this would hold off the day of reckoning with Congress for as much as a year. Well worth the buck (plus big fees) they had to pay to get it done.
So this looked like a go. But there was a snag. Second/third hand I heard the following:
One of the big houses (GS?) was in touch with big slugs of the old pref that wanted to do the deal. The smart guys on the trading desk wanted to get Freddie to up the value of the Warrant. So they tried a squeeze. They put a When Issued price on the Street of –.10/+.10 on 10mm Warrants. This implied that the Warrants had no value.
The deal team went back to Freddie with the 'bad news' hoping to get them to up the Warrant to $1.75. What I heard was that the guys at Freddie couldn’t understand how the Street could value their promise to pay $1 at –10 cents. They were so confused that they decided to shelve the deal.
Look for this one to come back with a Warrant value of $1.50 cents. It is a compelling transaction for both sides at that price.
ah-hem....
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the plot thickens
if i break a stitch i'm holding you responsible, karsting.
i've been laughing with tears for 10 minutes. this made my day...
Anything that smells of the "gov"t .....RUN!!!
Fannie, Freddie, AIG, Citi, GMAC, Chrysler, etc., anything the gov't touchs turns to crap....buy it and it'll go down....short it and they'll stop the trades.
Gov't can't keep their friggin hands out of anything and anything they touch will most certainly turn to crap. They make the rules and change the rules and change the rules again.
Lord help us!
Okay done with this rant.
I bought some old prefs the other day (small position) after reading John Hemton's case for them over on Bronte Capital.
I never quite comprehended until now the old wall street saying of "Never underestimate the capability of Wall Street to create new ways to sell the same stuff."
Lesson learned.
This can only occur when no one is willing to call a spade a spade.
very solid all around
You got to be kidding.
Hempton @ Bronte Capital says he has been loading up on Freddie Prefs
If the Government would back it up, I would buy it :)
LOL..Meet the new and improved Super Superior traunch of government hand job cdo's...