Freddie Sells $6 Billion in Preferred Stock to Bolster Capital

Freddie Mac, the second-biggest U.S. mortgage-finance company, sold $6 billion of non-convertible preferred stock to bolster capital amid a deepening housing slump.

The stock will pay an 8.375 percent fixed dividend for five years and then shift to 7.875 percent or to 416 basis points above the three-month London interbank offered rate, Freddie Mac said in a statement today. Libor, a borrowing benchmark, is currently set at 5.123 percent. A basis point is 0.01 percentage point.

Investors showed “a whole lot of interest on not a whole lot of” securities, said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan. “It’s a good indication risk aversion hasn’t reached such a point that no level can entice a buyer.”

Losses from defaulted mortgages eroded Freddie Mac’s core capital to only $600 million above the government-required minimum last quarter, prompting the McLean, Virginia-based company to sell shares and halve its dividend to 25 cents. Impairments from rising foreclosure filings and falling home prices are likely to continue into next year, Freddie Mac said on Nov. 20. The company owns or guarantees one in five U.S. residential mortgages.

Freddie Mac sold 240 million preferred shares at $25 each, according to the statement.

The “offering was substantially over-subscribed,” Freddie Mac Chief Executive Officer Richard Syron said in the statement. The sale will enable the company “to continue fulfilling our important housing mission through the current market environment and better position us to effectively manage the company.”

No Convertibles

The company earlier today said it eliminated a convertible portion of the preferred stock sale.

A “tremendous amount of investor interest,” lessened the need for Freddie Mac to sell more costly convertible shares, which could later be exchanged for common stock, Raymond Remy, head of fixed income in New York at Daiwa Securities America Inc., said.

It’s “very good news” because such securities are “much more expensive” than the non-convertible kind, said Gary Gordon, an analyst at Portales Partners LLC in New York. “With the conversion feature, they say they will essentially issue common stock at this low of a price,” he said. “It is very expensive for shareholders.”

Lehman Brothers Inc. and Goldman Sachs & Co. helped manage today’s sale.

Previous Preferred Sale

Freddie Mac sold $500 million of preferred shares in September with a fixed dividend rate of 6.55 percent. Larger competitor Fannie Mae this month raised $500 million in preferred stock after reporting a third-quarter loss of $1.4 billion.

Freddie Mac on November 20 reported a third-quarter net loss of $2.02 billion, or $3.29 a share, three times what some analysts estimated. Freddie Mac shares that day tumbled 29 percent for its biggest decline since it started trading in 1988.

The stock rose 9 cents to $29.51 today in New York Stock Exchange composite trading. It gained 14 percent yesterday, the sharpest one-day climb since 1988.

Congress created Freddie Mac and Fannie Mae to increase mortgage financing by buying loans from lenders. The companies profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.

Freddie Sells $6 Billion in Preferred Stock to Bolster Capital
By James Tyson | Bloomberg