Capital Markets

Freddie Buoys Cash with Cuts, Offering

To bolster its balance sheet, Freddie Mac slashes its dividend and plans to tender a big block of preferred stock.
Stephen TaubNovember 28, 2007

Freddie Mac announced two key moves designed to boost its capital and conserve cash in the wake of the subprime mortgage crisis. The nation’s second largest mortgage company said that it halved its quarterly dividend on its common stock to $0.25, and will raise $6 billion in an offering of preferred stock.

The decision to cut the shareholder payout was part of a previously stated strategy that focuses on managing cash to maintain its 30 percent mandatory capital surplus target while remaining flexible enough to effectively manage its business. As a quasi-government agency, a surplus target is imposed on Freddie Mac by the Office of Federal Housing Enterprise Oversight.

The stock will be offered in two stages, and capital raised from the issues will be used to bolster the company’s capital base in light of actual and anticipated losses. Those losses were exposed in recent financial results filed in accordance with generally accepted accounting principles. The additional capital will also help Freddie Mac meet the regulatory surplus target.

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“Freddie Mac is announcing today a proactive capital management plan that will help us meet the 30 percent surplus and address regulatory concerns and GAAP accounting requirements, provide sufficient capital to continue fulfilling our important housing mission through the current market environment, and better position us to effectively manage the company going forward,” said Freddie Mac Chairman and Chief Executive Officer Richard F. Syron.

Freddie Mac’s estimated regulatory core capital was approximately $34.6 billion at the end of September. Its minimum capital requirement at that date was $26.2 billion, and the 30 percent mandatory target capital surplus amounted to an additional $7.9 billion. As a result, Freddie Mac’s estimated regulatory core capital on September 30 represented an estimated cushion of $8.5 billion in excess of the company’s regulatory minimum capital requirement, and an estimated surplus of $600 million in excess of the 30 percent mandatory target imposed by OFHEO.

Some observers are skeptical of Freddie Mac’s recent tactics, surmising that while cutting the common dividend will free up more cash, offering preferred stock locks the company into regular payments of other dividends. “To me, it just adds another liability to their books,” Eric Bjorgen, co-manager at Leuthold Core Investment Fund, told “They’re probably not finding much in the bond markets and they’re finding that traditional avenues have dried up.”