1/ After talking to some people last night about potential resolution of GSE's, I need to explain how corporate structure works with application to GSE's. This is going to be the thread about it and exploring Collins relief options on corp structure.
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2/ Corporate structure is about what asset class lays claims on assets of corporation. In this case it's equity (as Assets-Liabilities). GSE's equity has three classes in order of seniority. $200B face SPS, $33B face JPS and common+80% warrants.
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3/ Currently all classes are impaired as equity is $17B. But Collins lawsuit proposes 2 reliefs. First I want to explain relief where $200B 10% SPS stays on books, but there is a recap.
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4/ Well, even at $125B return of credits by UST with $17B equity on books, SPS are still impaired as of now (that $17B will grow, but it's not important for this argument). So impaired SPS will need to convert to common.
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5/ How can that work. Sure they can keep some SPS on the books, but common will need to have equity to be worth anything. It's a financial stock that essentially sells insurance on MBS. They need equity to absorb risk. So SPS will create new common.
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6/ That common will have it's share of total equity. Here lies a problem for UST. Right now through SPS they are sole owners of entire equity of GSE's. To create new common with equity (and it's a necessity in any reorg), JPS have to be dealt with.
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7/ JPS are not convertible, so they have to accept a haircut or not, but essentially they have to be made whole. For that to happen, SPS has to give up $33B of it's equity in GSE's. Which is immediate $33B loss to UST.
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8/ Thus this relief entails $33B and is unlikely unless UST wants to lose it's warrants value, and return $33B to HFs with JPS. So this relief, while is an option, it's not a profitable option for UST.
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9/ Lets consider relief 2 where UST got $25B extra for SPS. That relief retires SPS, and retained earnings capitalize JPS. Why is this more profitable for UST? Because of the warrants. Right now if UST is to return $25B to GSE's, only $16B goes to JPS.
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10/ The $9B goes to common+ warrants. That's $7B back to UST pocket. As equity grows, less and less credits from this potential return capitalize JPS, and at some point that overpayment just becomes mostly UST's warrants capital.
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11/ So if you consider what happens on corp structure of the GSE's you will arrive that the most profitable of Collins options is the one with SPS repaid. It also provides visibility of how warrants will be dealt with.
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