Freddie Mac Sells $6 Billion in Preferred Stock After Mortgage Losses
Freddie Mac on Thursday said it sold $6 billion in preferred stock in a record deal that met with strong investor demand as the U.S. home financing company shored up its capital after sustaining mortgage losses.
The perpetual preferred issue was priced at $25 per share with a dividend rate of 8.375 percent fixed for five years, according to Freddie Mac, the second biggest provider of U.S. home financing. The issue, if not redeemed, would float after five years at the three-month London interbank offered rate plus 4.16 percentage points, with a floor at 7.875 percent.
Government-sponsored Freddie Mac, empowered with some $30 billion in orders for the issue, was able to lower the yield paid to investors from the “mid- to high-8 percent range” on Wednesday, said John Radwanski, assistant treasurer for the McLean, Virginia-based company. The demand also allowed Freddie Mac to drop a planned convertible portion as a “prudent” move for equity holders, he said.
The success for Freddie Mac’s largest-ever preferred issue came just eight days after the company surprised investors with a $2 billion third-quarter loss, as deteriorating credit on mortgages it owns or guarantees sent expenses soaring. To do the preferred deal, Freddie Mac dispatched two executive teams to New York and the west coast to reassure investors over the company’s financial standing, Radwanski said.
“The Freddie Mac preferred issue is likely to begin trading well, especially given the initial excess demand for the issue,” said Christopher Sullivan, chief investment officer for the United Nations Federal Credit Union in New York.
Some prospective buyers on Tuesday had said the yield might be as high as 9 percent, even as 8.25 percent was initially floated to investors, sources said.
Despite the lower-than-expected cost, the yield is still far above that of Freddie Mac’s last preferred stock sale. In September, the company raised $500 million from 20 million preferred shares sold at a dividend rate of 6.55 percent.
But Freddie Mac’s success in winning investor support has eased concerns that the company would fall short of capital. Shares of Freddie Mac climbed for a second day, rising 0.31 percent to $29.51 on the New York Stock Exchange.
“We are raising capital in this offering to enable Freddie Mac to continue fulfilling our important housing mission through the current market environment, and better position us to effectively manage the company going forward,” Freddie Mac Chief Executive Officer Richard Syron said in a statement.
Tight pricing on the issue suggests investors believe Freddie Mac can resume growth despite dire assessments for the U.S. housing through 2008. Asset sales from its $703 billion portfolio, which have hurt prices on Freddie Mac-issued mortgage-backed securities, in the future should be short-lived, analysts at UBS Securities said in a note.
Ties to Congress and their role in the housing market has also helped Freddie Mac and Fannie Mae maintain unfettered access to markets through other times of stress, including their accounting scandals in 2003 and 2004 that produced more than $11 billion worth of profit restatements, Sullivan said.
“The perceived, but incorrect, notion of implicit federal backing helps immeasurably in this regard, as does also the idea that these companies are quite viable still and remain an integral component of the mortgage market,” he said.
Thursday’s preferred stock sale was led by Lehman Brothers Holdings Inc and Goldman Sachs Group Inc.
Capital of $34.6 billion at Freddie Mac at the end of September was just $600 million above levels required by its regulator after its accounting scandal unfolded in 2003. The regulator, the Office of Federal Housing Enterprise Oversight, was comfortable with Freddie Mac’s capital as long as the preferred stock was announced by month end, Radwanski said.
Freddie Mac sells $6 billion in preferred stock
By Al Yoon | Reuters