NEW YORK Aug. 26, 2008--Standard & Poor's Ratings Services said today that it affirmed its 'AAA/A-1+' senior unsecured debt rating on Freddie Mac with a stable outlook.At the same time, we lowered the risk-to-the-government stand-alone issuer credit rating to 'A-' from 'A', the subordinated debt rating to 'BBB+', and the preferred stock rating to 'BBB-' from 'A-'.
The ratings that were lowered are all placed on CreditWatch Negative.
"Our expectation of continued government support for the mortgage government-sponsored enterprises, as detailed in the description of their expanded role in the U.S. Treasury's Economic Stimulus Plan released earlier this year, is reflected in our affirmation of the long-term 'AAA' and short-term 'A-1+' senior unsecured debt ratings," said Standard & Poor's credit analyst Victoria Wagner.(middle right photo)
The government-supported enterprises' mortgage franchises are viable and critical to th
e financing of the U.S. mortgage market and to the overall economy.
e financing of the U.S. mortgage market and to the overall economy. The lowering and placement on CreditWatch Negative of Freddie Mac's nonsenior ratings reflects the heightened uncertainty about whether government support will extend to these securities.
The risk-to-the government rating was lowered and placed on CreditWatch Negative because of the expected stress on capital and earnings Freddie Mac faces during the next several quarters.
The lowered ratings also reflect the challenging market conditions Freddie Mac faces in manag
ing its core mortgage business, and the likelihood that it will require additional capital to offset mounting losses and maintain its regulatory capital ratios at an acceptable level.
ing its core mortgage business, and the likelihood that it will require additional capital to offset mounting losses and maintain its regulatory capital ratios at an acceptable level. The depressed equity pricing of its common and preferred securities and the looming uncertainty about Treasury's financial assistance has created an even more challenging operating environment, significantly inhibiting Freddie Mac's financial flexibility.
Freddie Mac's management has committed to raising $5.5 billion of equity, as both common and preferred stock.
However, if Freddie Mac fails to execute this transaction, it heightens the likelihood that Treasury will have to provide support, which in turn m
ight lead to some losses for existing preferred and subordinated debt holders.
ight lead to some losses for existing preferred and subordinated debt holders. Treasury is in a unique statutory role and can set the terms of its investment while considering the broader systemic and economic issues and protecting taxpayers.
Treasury's support could take several forms as outlined in Public Law 110-289. It could be straightforward funding support through expansion of the Treasury line, buying Freddie Mac's debt or its agency mortgage-backed securities, or it could consider an equity investment.
The possibility of an equity investment is driving Freddie Mac's equity price lower and the yield on its preferred stock higher.
An equity investment by Treasury could be accompanied by the consideration of nonpayment of 
existing preferred stock and common dividends.
existing preferred stock and common dividends. The subordinated notes pose incremental risk to investors because of an interest deferral feature given certain trigger events tied to Freddie Mac's regulatory capital levels.
The subordinated debt covenant language also states that a deferral of the subordinated debt interest payment triggers the nonpayment of all preferred stock and common dividends, arguing for a close alignment of preferred stock and subordinated debt ratings.
However, we now rate the preferred stock two notches below the subordinated debt to reflect the increased risk of nonpayment of dividends as a means of capital preservation.
Furthermore, there are no covenants restricting the payment of interest on the subordinated debentures, while the preferred dividends are suspended.
Our nonsenior and risk-to-the-government ratings on Freddie Mac will remain on CreditWatch Negative until further clarity can be derived regarding Treasury's intention surrounding financial assistance and further clarity on Freddie Mac's execution of its capital-raising initiatives and the degree of capital cushion it holds over regulatory capital ratios.
Media Contact: Jeff Sexton, New York, (1) 212-438-3448 jeff_sexton@standardandpoors.com
Analyst Contacts:
Victoria Wagner, New York (1) 212-438-7406
Daniel E Teclaw, New York (1) 212-438-8716
Media Contact: Jeff Sexton, New York, (1) 212-438-3448 jeff_sexton@standardandpoors.comAnalyst Contacts:
Victoria Wagner, New York (1) 212-438-7406
Daniel E Teclaw, New York (1) 212-438-8716
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