How shady is this morning’s delightful Journal story about the travails of Equity Inns preferred stockholders? I think the answer is “just the right amount of shady,” but you might disagree. The gist is that Goldman Sachs real estate private equity funds bought out Equity Inns but left almost $150mm of preferred stock outstanding. Once ENN was no longer a public company (because Goldman owned all its common stock and it had fewer than 300 shareholders), it delisted its preferred stock and stopped providing public financial information.1 This saddened the preferred holders and they expressed their sadness by bidding down the price of the preferred to under 40 cents on the dollar.
Also by complaining to the company, and the SEC, and the Journal, and anyone else who will listen. Also by doing this:
One of the preferred shareholders is responding by creating 300 separate trusts to hold his preferred shares. He argues that should qualify the company for reporting.
Should it? I don’t know but I love it. You gotta fight silly formalism with silly formalism. Read more »
Articles about the Fannie & Freddie preferred trade have been burbling around for a while and I’ve never understood it. The Journal has two goodarticles on it today, with this being a particularly clear explanation, and … I still don’t get it? Basically the thing is:
the government seized Fannie and Freddie in 2008 and turned off the (non-cumulative!) preferred stock dividends,
it recently swore that it would reduce their shareholders’ equity to zero, salt the earth on which they grew, and never ever ever ever unseize them or turn back on the pref dividends, so
those prefs look like a screaming buy.
Or something? Per the Journal, “Paulson & Co. and Perry Capital LLC are among a handful of hedge-fund firms that have bought so-called preferred shares in Fannie and Freddie.” They’re selling at ~18-20 cents on the dollar, which I suppose reflects a, what, 30% implied probability that they get turned back on in the imaginable future?1 Does that sound like, um, this? Read more »
Hahaha no of course it doesn’t mean that. It means nothing! Except that everyone is kind of peeved. There are some things you could say against Calpers corporate-governance guru Anne Simpson’s position on Apple/Einhorn, but she’s not wrong about this:
“I came off the call deeply puzzled,” Anne Simpson, the pension fund’s director of global governance, told DealBook in an interview after [yesterday’s Einhorn] call [pitching iPrefs]. “He finished off by saying you should vote against Proposal 2 to send a message, but he’s in court trying to prevent Proposal 2 from going ahead.”
I used to work on sort of a cats-and-dogs capital markets desk, which occasionally meant that spivvy companies without great access to the equity and bond markets, or industry bankers who were a bit too clever for their own good, came to me and asked “hey, what if we issued preferred stock?”1 I cannot recall that ever working out well. “Preferred stock” is a thing that exists in corporate finance textbooks, and occasionally solves for quirky corporate finance equations (“can we structure this investment as debt only it isn’t debt …”), but its practical uses tend to be limited to:
private companies, private investments in public companies, joint ventures, VC investments, and other non-publicly-traded things;
convertible preferred stock, which is not really the same thing at all;
a couple of sectors that are really into leverage, capital-structure engineering, and retail financing – meaning mostly banks, insurance companies and REITs.
So David Einhorn’s too-clever-for-his-own-good “iPrefs” deck brought back fond memories: why not convince a tech company that the next level of financial-engineering innovation is to issue preferred stock? And, since the phrase “preferred stock” does still kind of conjure up turn-of-the-last-century financial markets and/or cheesy cologne, why not rebrand it as “iPrefs”? There is something … something very investment-banker-y about taking an absolutely standard financial product, giving it a different name, and calling it an innovation. Of course I love it.
The only thing I love more than the name is the ambition. Read more »
The beginning of a new year seems to be a popular time to check in on Warren Buffett for some reason, perhaps because a lot of people’s New Year’s resolution is “invest more like Warren Buffett”? Sure, why not. So how’s he doing?
Warren Buffett’s bet on Bank of America Corp. and a more-generous buyback plan helped his Berkshire Hathaway Inc. beat the Standard & Poor’s 500 Index in a year when he didn’t make a major acquisition.
Class A shares advanced 17 percent last year, beating the 13 percent gain in the S&P 500. … Book value may have climbed to $113,579 a share on Dec. 31, according to an estimate from Meyer Shields, an analyst at Stifel Nicolaus & Co. That would give Buffett’s firm a 7.8 percent annual growth rate for the five years ended 2012, compared with 1.7 percent for the S&P 500, including dividends.
Yay. It’s worth noting that his buyback was controversial when it was announced like three weeks ago, but the stock is up by 6.5% since then, yielding Buffett a three-week $80 million profit.
Buffett has also made untold gazillions of dollars on his investment in Bank of America preferred and warrants in 2011. I feel like this passage, from today’s “Heard on the Street” column dithering about whether BofA should buy back the preferred stock, provides some clue as to why: Read more »