NEW YORK (Reuters) - Freddie Mac <FRE.N>, the second largest provider of financing for U.S. home loans, on Tuesday said it halved its quarterly dividend and will sell $6 billion in preferred stock to bolster capital in anticipation of mortgage-related losses.
By Jennifer Ablan and Al Yoon
NEW YORK (Reuters) - Freddie Mac <FRE.N>, the second largest provider of financing for U.S. home loans, on Tuesday said it halved its quarterly dividend and will sell $6 billion in preferred stock to bolster capital in anticipation of mortgage-related losses.
Freddie Mac's move to buoy its waning capital base follows $2 billion in third-quarter losses on soaring credit expenses tied to worsening credit on mortgages it owns or guarantees, and expectations the housing slump will deepen.
The company last week had warned that it may slash its dividend and further pare its $700 billion investment portfolio in addition to a possible preferred stock offering. The government-sponsored enterprise, or GSE, had said it was aiming to raise enough capital to last through 2008.
!ADVERTISEMENT!"This is the first step in my view, they might have to do more," said Rajiv Setia, a strategist at Barclays Capital in New York. "What this does is really protect them for the next few quarters from any adverse marks to their portfolio."
Freddie Mac's board on Monday approved a quarterly common stock dividend of 25 cents per share, a 50 percent drop from the previous quarter, as part of its strategy of meeting a capital surplus mandated by its federal regulator, the McLean, Virginia-based company said in a statement.
The capital management plan "will be used to bolster the company's capital base in light of actual and anticipated losses necessitated by" accounting requirements, Richard Syron, Freddie Mac's chief executive officer, said in the statement. That should provide enough capital to operate through the current market environment, he added.
Stress at Freddie Mac and larger Fannie Mae <FNM.N> has stunned investors who see losses as evidence the mortgage crisis once limited to subprime loans has spread to prime mortgages that make up most of the companies' businesses. Freddie Mac has invested in subprime loans to a greater extent than Fannie Mae, leaving it more exposed as home prices fall and foreclosures rise.
The GSEs have been hailed as some of the last resorts to stabilize the housing market as investors burned by subprime losses pull support for securities that had been cheaper sources of funding for U.S. lenders. Raising capital through preferred stock allows Freddie Mac to continue raising money for loans through mortgage bond issuance and purchases for its portfolio, analysts said.
The preferred issue "gives them the capital flexibility to continue to participate in the mortgage market, said Howard Shapiro, an analyst at Fox-Pitt, Kelton in New York. But it's not good news for common shareholders."
FREDDIE SHARES HIT
Shares of Freddie Mac fell 2.3 percent to $25.15 after the close of New York trading, when Freddie Mac announced its plans. Freddie stock earlier climbed after Reuters reported preliminary details of the preferred stock issuance.
The bulk of the perpetual preferred issue, led by Lehman Brothers Holdings Inc <LEH.N> and Goldman Sachs Group Inc <GS.N>, was being marketed on Tuesday with a coupon fixed at 8.25 percent for five years, according to sources close to the deal. If the preferred stock issue is not redeemed after five years, the coupon would float at London interbank offered rates plus 300 basis points, the sources said.
Freddie Mac also said its offering would include a small portion of convertible preferred stock.
Fitch Ratings on Tuesday said it expects to cut its ratings on Freddie Mac's preferred stock by one notch if the $6 billion sale goes through as currently planned. The preferred stock is now rated "AA-minus," the fourth-highest rating.
Freddie Mac, which as one of the "most nimble" issuers can sell bonds in a day or two, appears to be taking a slower approach with the preferred stock, said Michael Kastner, head of fixed-income at Sterling Stamos Capital Management in New York, which invests $5 billion. Freddie Mac may offer investors higher yields to improve buyers' chances of gains in secondary trading, he said.
As financial markets stabilize, the deal "can get done relatively easily" at levels near early price talk around 8.6 percent, he said. "But if we have another pocket of worry, (Freddie Mac's) borrowing costs can shoot above 9 percent."
Investors on Monday expected a Freddie Mac preferred stock issue would yield between 8.5 percent and 8.75 percent, based on the recent rise in rates on existing Fannie Mae and Freddie Mac issues.
Freddie Mac last sold preferred stock in September, when it raised $500 million from 20 million shares offered at $25 each at a dividend rate of 6.55 percent.
Spokesmen at Goldman Sachs and Lehman Brothers declined to comment.
