This is the same title of an article that I wrote one year ago related to an European ISP (Internet Service Provider).
That company had no cash, so the coupons of its bonds were paid in shares. The bondholders were short-selling the stock in order to lower the share price, so they could accumulate as more shares as possible on their coupons. This way, they could recoup their investment more rapidly. A few weeks later, a debt restructuring plan was announced and the bondholders accepted a haircut and exchanged their bonds for common shares at fire-sale prices. The conversion price was even lower than the market price of the common shares, but the stock skyrocketed because the prospects of a very viable road to recovery outweighed any future dilution to common stock.
At that time, everybody thought I was crazy, ha, ha, ha, but I almost tripled my investment.
Freddie Mac and Fannie Mae: We are in the same case.
Two days ago, at the CNBC event, Obama signaled that in the General Motors´ case, everybody gave up something: government, bondholders and shareholders. This time could be the same:
1# The US government has now $152 billion in senior preferred shares. The US banks will be forced to buy all or part of the senior preferred shares and then they will be exchanged for common shares (Privatization of the GSE´s). The banks must help in the restructuring plan because they sold the bad mortgages to FnF and caused all this mess. Also, the government could accept a haircut and be part of the common shareholders. The banks, in connivance with the government, are short-selling the common stocks of Fannie and Freddie because if they trade at fire-sale prices, they will receive more common shares when the senior preferred shares are exchanged for common shares. The banks, short-selling , and the politicians trying to cool down Fannie and Freddie share price saying that they will be abolished, eliminated, wound down, etc… Both are just market manipulators and either the small investor or a hedge fund should take advantage of this.
2# Bondholders ought to take a haircut as well and swap part of the debt for equity, because the bonds are not backed by the same "full faith and credit" guarantee as bonds issued by U.S. federal government agencies (see the prospects of the bonds). Any restructuring plan needs to lower the level of debt because the companies are smaller (they are reducing their balance sheet). Larry Summers has spent the last week explaining this to the Chinese as China is a major bondholder. China has allowed to appreciate the Yuan after Larry Summers´ visit, so it seems they are be very pleased with FnF´s restructuring plan.
3# Common shareholders will be diluted 80-90%, but a very viable road to recovery outweighs any future dilution.
Another issues that will be announced in the January reform:
* F&F will merge in order to simplify the capital structure and save costs.
*The Treasury will continue to guarantee mortgages (implicit guarantee), but with a higher fee on banks in order to reduce taxpayer´s risks. That will continue to help the housing market and the whole economy. Since the first full quarter in conservatorship (4Q08), combined completed foreclosure prevention actions total 1,013,700 (Loan modifications and refinancings).
* The Treasury, if doesn´t take a haircut, will make a profit with the 10% dividend on the senior preferred shares ($16 billion so far) plus the $2 billion worth of senior preferred shares received without cost (see Bailout Agreement). It will be a profit for the risks of helping the GSEs. That´s what the 10% dividend is for. We have to take into account that the objective of any bailout is not to make a profit.
* So, the government won´t exercise the warrants to get paid. Warrants representing an ownership of 79,9% of common shares were issued to avoid any take over, as a poison pill.
* The rest of preferred shares will be exchanged for commons too with a hit, to simplify the capital structure.
It is worth noting that this is a Democrats´ plan and will be released on January. The Republicans don´t want a higher fee on banks, and will not force banks to repurchase the bad mortgages sold to FnF that, ultimately, caused a recession around the world. The Republicans always advocate for the big banks and would like to privatize the GSEs but pulling out the government guarantee. That means that the mortgage rates will skyrocket and would lead us to another recession. So, the Democrats must win in the next elections in order to avoid conflict in the Congress.
Now, everybody thinks I´m crazy, ha,ha,ha…