B. Riley FBR analyst Randy Binner upgraded both Fannie Mae (FNMA) and Freddie Mac (FMCC) to Neutral from Sell with price targets of $2, up from $1. The U.S. Supreme Court last week agreed to hear investor claims that potentially “upend the legality” of Federal Housing Finance Agency’s authority and the cash flow sweep itself, Binner tells investors in a research note. Government actions around the government sponsored entities have always been questionable, and a re-examination of these issues “could be materially positive” for shareholders and lead to the forgiveness of the senior preferred, contends the analyst. While a recap could still be highly dilutive for Fannie and Freddie common holders, the junior preferreds have much less dilution risk, and this court action could be materially constructive for the junior preferreds, contends Binner. He believes the potential Supreme Court action would likely trump COVID-19 earnings pressure and “introduces a binary outcome that is more consistent with Neutral ratings on the common equity.”
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