Fannie, Freddie (FNM, FRE) Get A Bounce Following Report Suggesting Shareholder Interest Could Be Preserved
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Shares of embattled GSE's Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are slightly higher this AM, after trading in the red earlier, with traders possibly hanging their hat on a report from Citigroup which suggested shareholder interest could be preserved. This report counters a recent Barron's story which suggested shareholder equity could be wiped out.
Citi said the recent sell-off has been surprising given the only catalyst was the Barron's report suggesting the Treasury will recapitalize the GSEs soon. Citi said while the GSEs' fundamentals have not changed, the sharp price decline could limit their financial flexibility.
Citi said the GSE are not entirely without options, saying: 1. policymakers could publicly reassert the benefits of the backstop plan; 2. regulator could ease the arbitrary capital surplus requirement further; 3. the GSEs could free-up capital by selling MBS to Treasury and/or allowing portfolio assets to run down over time; 4. given sufficient capital through at least YE08 all parties could wait-it-out until market conditions calm.
Citi also said while nationalization of the GSEs is unlikely, the GSEs challenges and significance to the economy may eventually require action. They said if action is required, this doesn't necessarily wipe out all stakeholders - pointing to the Chrysler bailout.
Citi said, while actions are uncertain, they expect shareholders' interest to be preserved and the GSEs should continue to be most effective in their current shareholder owned form.
Citi said there are signs that the 'Paulson Plan' is working. They said "recent notes issued by FRE, which were oversubscribed and included 40% participation from non-U.S. investors (30% Asian) showed the success of the backstop plan, regardless of the price paid (which is more of a business issue than an access to funding issue). The $3 billion 5 year note issuance was priced at 113 bps over Treasuries, which was an unusually high price; however, once the securities were free to trade, their spread compressed to around 90 bps. We believe the success of this debt issuance reflects FRE's solid access the capital markets and is a positive indicator of the success of the 'Paulson Plan'."
The firm has a Buy rating on both firms, with a $9 price target on Fannie Mae and a $6 price target on Freddie Mac.
Shares of Freddie Mac are up 10.7% today to $3.11 and shares of Fannie Mae are up 3.8% to $5.19.
Citi said the recent sell-off has been surprising given the only catalyst was the Barron's report suggesting the Treasury will recapitalize the GSEs soon. Citi said while the GSEs' fundamentals have not changed, the sharp price decline could limit their financial flexibility.
Citi said the GSE are not entirely without options, saying: 1. policymakers could publicly reassert the benefits of the backstop plan; 2. regulator could ease the arbitrary capital surplus requirement further; 3. the GSEs could free-up capital by selling MBS to Treasury and/or allowing portfolio assets to run down over time; 4. given sufficient capital through at least YE08 all parties could wait-it-out until market conditions calm.
Citi also said while nationalization of the GSEs is unlikely, the GSEs challenges and significance to the economy may eventually require action. They said if action is required, this doesn't necessarily wipe out all stakeholders - pointing to the Chrysler bailout.
Citi said, while actions are uncertain, they expect shareholders' interest to be preserved and the GSEs should continue to be most effective in their current shareholder owned form.
Citi said there are signs that the 'Paulson Plan' is working. They said "recent notes issued by FRE, which were oversubscribed and included 40% participation from non-U.S. investors (30% Asian) showed the success of the backstop plan, regardless of the price paid (which is more of a business issue than an access to funding issue). The $3 billion 5 year note issuance was priced at 113 bps over Treasuries, which was an unusually high price; however, once the securities were free to trade, their spread compressed to around 90 bps. We believe the success of this debt issuance reflects FRE's solid access the capital markets and is a positive indicator of the success of the 'Paulson Plan'."
The firm has a Buy rating on both firms, with a $9 price target on Fannie Mae and a $6 price target on Freddie Mac.
Shares of Freddie Mac are up 10.7% today to $3.11 and shares of Fannie Mae are up 3.8% to $5.19.
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