Subordinated Debt (Freddie SUBS®)
In October 2000, Freddie Mac announced its voluntary adoption of a
series of commitments designed to enhance market discipline, liquidity
and capital. On September 1, 2005, Freddie Mac entered into an agreement
with OFHEO that updated those commitments and transformed the voluntary
nature of those commitments into a formal regulatory process enforceable
by OFHEO. Under the terms of the agreement, beginning in January 2006,
Freddie Mac will issue subordinated debt, which it refers to as Freddie
SUBS® securities, pursuant to bi-annual plans reviewed by OFHEO. Freddie
Mac will issue subordinated debt for public secondary market trading and rated
by no less than two nationally recognized statistical rating organizations.
Expected Issuance of Freddie SUBS Securities
As part of the agreement with OFHEO, Freddie Mac committed to issue its
Freddie SUBS securities in a quantity such that the sum of total capital (core
capital plus general allowance for losses) plus the outstanding balance of qualifying
subordinated debt will equal or exceed the sum of outstanding net mortgage-backed
securities times 0.45 percent and total on-balance sheet assets times 4 percent. In
addition, Freddie Mac committed to take reasonable steps to maintain outstanding Freddie
SUBS of sufficient size to promote liquidity and reliable market quotes and to submit a
subordinated debt management plan for review by OFHEO every six months beginning January
1, 2006. The Freddie SUBS program is in addition to the subordinated debt issued prior
to October 2000. Past and future issuances of Freddie SUBS securities will not change
Freddie Mac's commitment to issue large, liquid senior Reference Notes® securities
according to the published financing calendar.
During 2001 and 2002, Freddie Mac completed four offerings of Freddie SUBS securities that provided approximately $5.5 billion in net proceeds. From 2003-2005, Freddie Mac did not issue any Freddie SUBS securities. In 2006, Freddie Mac resumed SUBS issuance and completed two additional offerings of Freddie SUBS securities, the first such offerings since February 2002. Freddie Mac’s ability to issue subordinated debt may be limited until the company returns to timely financial reporting.
Deferral of Interest Requirement
An important feature of Freddie SUBS securities is the interest deferral provision.
Although Freddie Mac has not deferred the interest payment on any outstanding issues of
Freddie SUBS securities, under the terms of the agreement, Freddie Mac must defer the
payment of interest for up to five years on all outstanding Freddie SUBS securities if:
- Freddie Mac's "core capital" falls below 125% of its "critical
capital" requirement, OR
- Freddie Mac's "core capital" falls below its "minimum
capital" requirement, and pursuant to the corporation’s request, the
Secretary of the Treasury exercises discretionary authority to purchase Freddie
Mac’s obligations under Section 306(c) of the Freddie Mac Charter Act
Calculations of percentages and remaining life will be as of the last day of each
month and effective until the last day of the following month.
Deferral of Interest Structure
Deferral on an issue of Freddie SUBS securities may extend for a period of up to
five years but not beyond the maturity date of the issue.
If Freddie Mac defers payment of interest on Freddie SUBS securities, interest will
continue to accrue and compound semi-annually at the stated coupon on the Freddie SUBS
securities. Freddie Mac will pay all deferred interest, as well as interest on that
deferred interest, on all Freddie SUBS securities, as soon as Freddie Mac no longer is
required to defer interest under the terms described above, and has repaid all debt
obligations, if any, purchased by the U.S. Secretary of the Treasury.
During periods when Freddie Mac defers interest payments on Freddie SUBS securities,
Freddie Mac may not redeem any outstanding issue of Freddie SUBS securities or declare
or pay dividends on, or redeem, purchase or acquire, its common stock or its preferred stock.
Deferral of Interest Function
Because of the interest deferral feature, prices for Freddie SUBS securities are
expected to reflect, among a variety of factors, the subordination of the debt and the
market's view of the adequacy of Freddie Mac's capital relative to its risks. This
interest deferral features should make Freddie SUBS securities a more comprehensive
measure of changes in Freddie Mac's risk profile than subordinated debt that does not
include such an interest deferral feature.
Moreover, for Freddie SUBS securities, interest payments will be automatically
suspended if the deferral triggers described above are met; Freddie Mac has no
discretion to defer interest payments under these circumstances. As a result of both
the interest deferral and the subordination features of Freddie SUBS securities, risks
borne by Freddie SUBS securities investors should be significantly different than for
senior debt holders.
No Acceleration Right
Freddie SUBS securities do not permit the holders to accelerate the maturity of
the securities upon default or the occurrence of any other event.
Freddie SUBS Securities and Government/Agency Indices
Freddie Mac has been informed that:
- Lehman Brothers includes Freddie SUBS securities in the agency component
of its global Aggregate Bond Index and U.S. Aggregate Bond Index;
- Merrill Lynch includes Freddie SUBS securities in the agency component of its
Global Broad Market Index and U.S. Broad Market Index; and
- Citigroup Inc. includes Freddie SUBS securities in the agency component of
its World Broad investment-Grade Bond Index and U.S. Broad Investment-Grade Bond Index.
Disclaimer
No Warranties; Limitation of Liability
Although Freddie Mac attempts to provide useful information, Freddie
Mac does not guarantee that the information posted on or linked to any
Freddie Mac Web site is accurate, current or suitable for any particular
purpose. Freddie Mac assumes no obligation to update or continue to post
or link to the information. Freddie Mac does not guarantee that access
to any Freddie Mac Web site will be uninterrupted, or that a Freddie Mac
Web site cannot be tampered with by third parties. While Freddie Mac has
implemented security measures designed to protect most information sent
to the Freddie Mac Web sites, Freddie Mac does not guarantee that information
sent to a Freddie Mac Web site will not be obtained, reviewed, disclosed
or tampered with by third parties.
No Offer or Solicitation of Securities. Freddie
Mac operates several Web sites, any one of which may include information
related to, or referenced in the offering
documentation for, certain Freddie Mac securities, including offering
circulars and related supplements and agreements. Freddie Mac securities
may not be eligible for offer or sale in certain jurisdictions or to certain
persons. The Information is provided for your general information only,
is current only as of its specified date and does not constitute an offer
to sell or a solicitation of an offer to buy securities. All Information
regarding or relating to Freddie Mac securities is qualified in its entirety
by the relevant offering circular and any related supplements. Investors
should review the relevant offering circular and any related supplements
before making a decision with respect to the purchase or sale of any security.
In addition, before purchasing any security, please consult your legal
and financial advisors for information about and analysis of the security,
its risks and its suitability as an investment in your particular circumstances.
|
 |
|
