Gross, Fuss say any new GSE deal needs Treasury

Two of the biggest U.S. bond investors said they would get involved in a capital raising by Fannie Mae and Freddie Mac as long as the U.S. Treasury participates in the new deals.
But Bill Gross, chief investment officer at Pacific Investment Management Co., and Dan Fuss, vice chairman of Boston-based Loomis Sayles, disagree on what shape any deal with Treasury should take, according to separate interviews on Friday.
Gross would be drawn to a straight preferred stock offering similar to securities sold by Fannie Mae and Freddie Mac in raising capital this year and last, while Fuss wants an offering of convertible debentures.
"We would buy preferred stock subject to significant Treasury participation and an attractive yield," Gross told Reuters by email.
Fuss, who helps oversee more than $100 bln in fixed-income securities at Loomis, has another idea.
Fuss told Reuters the troubled government-sponsored enterprises should raise $15 bln each in the form of 30-year convertible preferreds to build capital reserves.
The convertibles, which have characteristics of both a bond and a stock, would include a 5% coupon and a pre-set conversion price of around $6, Fuss said, given that Fannie Mae shares are now trading at $5.44 and Freddie Mac at $3.37.
"It is a long-term call on the common stock," Fuss said. "Without such a plan like this, shareholders might get zero. You want zero or ongoing companies?" said Fuss, who owns Fannie Mae and Freddie Mac agency debt and preferred securities.
The new 30-year convertible preferreds would be non-callable for life by Fannie Mae and Freddie Mac, while holders can convert the preferreds into common stock after holding them for six years, Fuss added. "Common holders will face dilution but it would be down the road with this plan," Fuss said.
Last week, executives at Freddie Mac were gauging investor interest from private-equity firms and other investors about the possibility of buying new common or preferred shares in the company, the Wall Street Journal reported.
But the Journal article said many investors fear any money they invest now in Freddie Mac or Fannie Mae will be lost later if the Treasury bails out the companies through an equity purchase.
The Treasury's investment in new convertible preferreds would add confidence that the securities would hold their value, Fuss said. "These new convertibles look outstandingly cheap," he added.
But Gross said a convertible preferred or convertible bond offering has no interest to him.
"The equity is virtually worthless and will continue to be," Gross said. "If the Treasury buys preferred stock, though, I would assume that would validate that class of equity during any liquidation/reprivitization."
Fannie Mae so far has raised more than $14 bln in capital since November to offset writedowns on mortgages it owns or guarantees. Freddie Mac has raised $6 bln since November.
Gross told Reuters last week that he doesn't believe a bail out by Treasury is imminent. "The election season and the relatively recent passage of the (Treasury) authorization argue for delay as long as possible," he said.
That delay, however, will be predicated on the notion that Fannie Mae and Freddie Mac can continue to sell discount notes and term debt at "relatively stable spreads," said Gross, who manages the $130 bln Pimco Total Return fund.
Monday, Freddie Mac easily sold $2 bln of debt, reassuring investors that it and Fannie Mae, who sold $2 bln of debt last week, can fund operations without a government takeover.