Freddie Mac, the second-largest U.S. mortgage-finance company, registered with the U.S. Securities and Exchange Commission, removing the biggest obstacle to selling common stock and increasing its mortgage holdings.
Freddie Mac intends to proceed with a $5.5 billion capital- raising plan it announced in May that ``will include both common and preferred securities,'' the company said in a statement today. The registration fulfills an agreement made six years ago with lawmakers before the government-chartered company's plans stalled after revealing $5 billion of accounting errors.
``Now they can start the process to do a capital raise a lot quicker than we thought,'' said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. ``We're still concerned about what the capital structure's going to look like going forward. But this removes a major overhang.''
McLean, Virginia-based Freddie Mac lost 64 percent in stock market value in the past month and the larger Fannie Mae declined 56 percent on concern they may not have enough capital to survive the housing slump. The stock slump prompted U.S. Treasury Secretary Henry Paulson to announce a rescue plan on July 13, seeking authority to buy equity in Freddie Mac and Fannie Mae and increase a credit line to the companies should they request it.
``Becoming an SEC registrant marks an important milestone for the company and demonstrates our commitment to enhanced transparency and financial reporting,'' Chief Executive Officer Richard Syron said in a statement.
$10 Billion
Freddie Mac climbed 85 cents, or 10 percent, to $9.18 today in New York Stock Exchange composite trading. Fannie Mae rose $2.47, or 23 percent, to $13.40.
``The timing, amount and mix of securities to be offered will depend on a variety of factors, including prevailing market conditions, and is subject to approval by our board of directors,'' Freddie Mac spokesman Douglas Duvall said in an e- mailed statement earlier in the day.
Freddie Mac may raise as much as $10 billion selling new shares to investors, avoiding an immediate government rescue and stricter oversight that would come with a bailout, the Wall Street Journal reported today, citing people it didn't identify.
Duvall declined to comment on the Journal report. Freddie Mac committed to raising the $5.5 billion through ``one or more offerings,'' Duvall said. The sale will include common and preferred shares, Duvall said.
``The question becomes: `Is $10 billion enough?''' said Miller, who has an ``underperform'' rating on Freddie Mac and Fannie Mae. ``It dilutes them. That's why we're cautious on the names.''
`Challenges'
Early indications of its second-quarter results show the company probably has enough capital to remain above the 20 percent mandatory surplus demanded by its regulator.
The quarter will reflect ``the challenges that face the industry,'' Freddie Mac said in the filing. ``We expect to take actions to maintain our capital position above the 20 percent mandatory target surplus.''
Freddie Mac has been exempt from registering its common stock and debt securities with the SEC since 1970 because of its government-chartered status. Fannie Mae registered in March 2003.
Syron said he decided to ``follow the advice of the lawyers'' and put off raising capital until the company registered with the SEC, according to an excerpt of an interview in the Journal.
Capital Raisings
The delays in becoming registered related to ``interpretations and disclosures of financial data,'' Syron told the Journal.
Syron told the Journal he was considering ``the full array'' of options for a capital raising. Freddie Mac said July 3 it is unlikely to raise capital until after its second-quarter earnings. Freddie Mac, which also said today it has no plans to cut its dividend, is scheduled to report next month.
Freddie Mac likely will split any capital raising between common stock and preferred shares, UBS analysts led by Eric Wasserstrom said in a July 10 report, citing conversations with Chief Financial Officer Anthony Piszel and Controller David Kellerman.
Fannie Mae and Freddie Mac have already raised $20 billion in the past year to cover losses. Freddie Mac had planned to sell $5.5 billion of stock next month. Because of ``unfriendly'' market conditions, Ofheo isn't pushing Freddie Mac to raise the capital, the UBS analysts said.
`Very Prudent'
Miller estimates Fannie Mae and Freddie Mac will each need to raise $15 billion. The companies would be ``very prudent'' to raise $10 billion to $15 billion, Barclays Capital analysts including Ajay Rajadhyaksha and Rajiv Setia in New York said in March. The companies don't need to raise capital immediately, Rajadhyaksha, head of U.S. fixed-income at Barclays, said in a telephone interview last week.
Moshe Orenbuch, an analyst at Credit Suisse in New York, estimates Freddie Mac may need $3 billion more after raising $5.5 billion.
Freddie Mac will probably report a bigger surplus above the statutory minimum required for the second quarter, according to the filing. The Office of Federal Housing Enterprise Oversight, Freddie Mac's regulator, agreed this year to lower the companies' surplus capital requirement from 20 percent to 10 percent after it registers with the SEC and raises new capital.
At the end of March, Freddie Mac had $6 billion more than the minimum required by regulators and Fannie Mae had $5.1 billion more, according to Ofheo data. With Fannie Mae raising an additional $6 billion in May and a reduction by Ofheo in required capital, the company ``had an additional $7.6 billion of capital heading into'' the second quarter, UBS analysts led by Laurie Goodman wrote in a note to clients yesterday.
Based on first-quarter data, Fannie Mae's core capital would have to drop by $26 billion and Freddie Mac's by $25 billion before either were declared critically undercapitalized, a classification that would make them subject to being placed in conservatorship, the analysts said.
