FNMA: my take on recent headlines

The resolution of Fannie/Freddie will be complicated and messy. The political nature of this situation will ensure that words are carefully chosen, news is advantageously leaked, and developments are framed in the best possible light. The key will be separating the tremendous amount of noise from what actually matters. If investors are solely focused on news headlines, the next 12 months will be a confusing mess. This is why my original post instead focused on Administration incentives. And if you solely focus on incentives and ignore the noise, my conclusion is that a swift global settlement between the FHFA/Treasury/shareholders makes […]

COOP: quick update on Q3 results

COOP reported solid and relatively uneventful Q3 results last week – this post will provide a quick review and update. Quarterly operating cash EPS was incredibly strong at $1.80/share. As a reminder, this figure is burdened for amortization of the embedded MSR fair value gain, so it correctly reflects a reasonable estimate for the current economic cost of replacing servicing runoff. Mortgage rates again declined in Q3 (~10bps), although the pace has slowed considerably vs. the first half of this year. Refinancing volumes remained well above-trend, further exacerbating what was already an incredibly tight supply/demand backdrop. The industry was reducing […]

FNMA: developing a recapitalization framework

My original FNMA post was focused on understanding the GSE model, why it failed, what happened, and where we go from here. It tried to explain how Administration incentives and legal constraints could shape the sequence of events over the next 15 months. I suggested that the junior prefs offer a superior risk-reward vs. the common shares in most recapitalization scenarios, but I didn’t fully walk through how that math could change based on different assumptions. The goal of this post is to lay out the analysis in a bit more detail and better understand the range of potential outcome […]

FNMA: new capital agreement

As expected, FHFA and Treasury announced their negotiated letter agreements allowing Fannie and Freddie to retain more capital. The Fannie and Freddie modifications can be found on the FHFA’s website: https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Mark-Calabria-on-Letter-Agreement-with-Treasury-to-Increase-Fannie-Freddie-Capital-Retention.aspx I’ll provide a few observations. (1) As opposed to allowing unrestricted earnings retention, the agreements instead increase the capital reserve buffer to specific thresholds – $25bn for Fannie and $20bn for Freddie. The most recent capital buffers were $3bn for each entity. Nevertheless, this will immediately suspend dividends to Treasury. (2) As suggested in the press, the increased capital reserve buffers will also increase Treasury’s senior preferred liquidation preference […]

Fannie Mae (FNMA): preferred shares are attractive at ~50 cents on the dollar

This wouldn’t be much of a special situations blog if I didn’t discuss Fannie Mae and Freddie Mac (the “GSEs”) at some point. I’ve followed the GSEs at a high level and recently decided it was worth developing an updated and refined view. This situation has dragged on and consumed a considerable amount of the event-driven community’s time and patience, yet most investors have little to show after a decade. Investors have been disappointed countless times over the years, however I do think this specific moment is unique and different for a variety of reasons. Fannie and Freddie securities have […]

GME: closed trade

After reviewing GME’s Q2 results, I exited my position this morning for a 20% gain. On balance I thought the quarter wasn’t that bad, but the likelihood of an aggressive buyback is lower. This was a large part of my prior thesis, so I’m trying to avoid thesis drift and move on with a profit. I’ll continue following this one. Most notably, the company reduced its FY 2019 SSS guidance from -5-10% to “a decline in the low-teens.” It was already clear that the late-cycle hardware headwinds and tough holiday comps made the prior guidance unrealistic, but management finally addressed […]

GME: recommending a trade (long)

After taking a first look at Gamestop at $5.50 and passing, the stock is down 28% to $3.98. I recently took another look, refined some of the analysis, and initiated a small trade with room to add more. Although I continue to believe that GME is facing significant challenges to its business model, I’m slightly more constructive in certain areas and do believe that you’re finally getting properly compensated for these uncertainties at the current price. I also believe that the prospect for near-term capital return should provide somewhat of a floor to the stock near these levels. I’ve refined […]

INLOT: quick reaction to Q2

Intralot’s Q2 results had some puts and takes but were mostly uneventful and neutral to the thesis. Q2 prop EBITDA came in a bit light and management similarly lowered 2019 guidance by ~8-10% (implying ~80mm of prop EBITDA at the midpoint). This figure continues to include Inteltek results in continuing operations (flattering results), but also excludes any Ohio terminal sales (expected for Q3). The expected negative variance is mostly driven by higher Illinois start-up costs, non-recurring Morocco guarantee payments related to the old contract (recently settled), and a Netherlands contract delay from Q4 ’19 to Q1 ’20. Most importantly, management […]

INLOT: justifying my projected trading values

I’ve received some great questions on my INLOT presentation since posting it last week and appreciate people taking a look. One recurring question is: how did I come up with my expected post-exchange YTM of 15%? It’s ultimately that assumption that drives my projected IRR for the 2024s, so it indeed is important. That assumption is definitely more art than science, but I’ll walk through my thinking in this post. One thing that I want to reiterate: my presentation laid out a specific liability management strategy to potentially deal with the 2021s – I think it’s helpful to show a […]

COOP: variant fundamental thesis is playing out

This post is a bit delayed, but I wanted to walk through my take on COOP’s Q2 results. I first recommended COOP at $9.01 when the 10 year UST was 2.39%… I did not expect to be at 1.48% today! With that said, I’ve always argued that COOP was much less rate sensitive than investors appreciated, and I think the Q2 results validated this. That doesn’t mean that it’s been a smooth ride, however, as the stock declined 24% from my initial recommendation before rebounding 44%, giving up those gains, and effectively ending up where it started. I did add […]

Intralot (INLOT): Compelling distressed situation – 5.250% Senior Notes due 2024

This post will include a 52 page presentation on a distressed situation that I think is interesting for a variety of reasons – Intralot. The company is a global provider of integrated gaming systems and services. The capital structure is relatively straightforward and primarily consists of two Senior Unsecured Notes issued by Intralot Capital Luxembourg S.A. After a variety of headwinds and missteps in recent quarters, the bonds are currently trading at distressed prices. I think the longer-dated 2024s are interesting here. If you haven’t already, you need to click “Read More” to see the presentation link below. -Matt

GameStop (GME): optically cheap special situation, but passing

Situation overview GME is the leading specialty video game retailer in the world. Most are aware that the company has endured tremendous secular pressures over the last several years. It’s been common for 40%+ of the float to be sold short at any given time, yet the company continued to produce solid levels of FCF for many years. With that said, it appears that industry pressures have finally caught up with GME – the stock is down ~75% over the last 2 years. I’ve followed the company at a high level for some time, but decided to refresh my work […]

OneMain Holdings (OMF): a misunderstood subprime lender, but waiting for an entry point

Idea introduction Consider the following question: what would you pay for a company that produces ~30% returns on tangible equity, possesses a durable competitive moat, and is growing ~5-10% (leading to ample reinvestment opportunities)? With only those facts, you’d probably say ~20-25x earnings. If I clarified that this company is cyclical and moderately levered but comfortably profitable at the bottom of the cycle, you would become more conservative and might suggest something closer to ~15x mid-cycle earnings. If I further clarified this was a subprime lender, most would probably laugh me out of the room. The brave might suggest ~8x […]

COOP: some quick thoughts on the stock

I don’t plan to frequently comment on short-term price movements in ideas that I’ve posted, but I wanted to provide a few quick thoughts on COOP following the 8-K this morning. COOP’s stock has been weak since my initial post and is down -20% thus far. This would be a large move for most stocks, but it’s less material for COOP given the (1) high operating leverage in this business, (2) high financial leverage, and (3) positive skew of outcomes (in my opinion). I don’t think much has changed on my thesis, but I did want to address recent macro […]

Mr. Cooper Group (COOP): An extremely mispriced call option

As a value investor, I generally try to find situations with easily understood business models, predictable results, and limited risk of capital impairment. Mr. Cooper Group (COOP) checks none of these boxes, so this will naturally be my first post! An 86 page investment presentation is included below. In my opinion, COOP represents a separate and potentially compelling opportunity set for value investors: options. This includes both (1) listed option instruments (call options, warrants) and (2) securities with call option-like characteristics (levered equities with small market caps relative to asset values). In either instance, there exists large upside if sentiment […]