Freddie Mac 2010 Annual Report Download - page 201

dividends and commitment fees not paid in cash. To the extent we draw on Treasury’s funding commitment, the liquidation
preference of the senior preferred stock is increased by the amount of funds we receive. The senior preferred stock is senior
in liquidation preference to our common stock and all other series of preferred stock.
In addition to the issuance of the senior preferred stock and warrant, we are required under the Purchase Agreement to
pay a quarterly commitment fee to Treasury. Under the Purchase Agreement, the fee is to be determined in an amount
mutually agreed to by us and Treasury with reference to the market value of Treasury’s funding commitment as then in
effect, and reset every five years. We may elect to pay the quarterly commitment fee in cash or add the amount of the fee to
the liquidation preference of the senior preferred stock. Treasury may waive the quarterly commitment fee for up to one year
at a time, in its sole discretion, based on adverse conditions in the U.S. mortgage market. The fee was originally scheduled
to commence on March 31, 2010, but was delayed until March 31, 2011 pursuant to an amendment to the Purchase
Agreement. Treasury waived the fee for the first quarter of 2011, but has indicated that it remains committed to protecting
taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.
Treasury stated that it would reevaluate whether the quarterly commitment fee should be set in the second quarter of 2011.
Absent Treasury waiving the commitment fee in the second quarter of 2011, this quarterly commitment fee will begin
accruing on April 1, 2011 and must be paid each quarter for as long as the Purchase Agreement is in effect. The amount of
the fee has not yet been determined and could be substantial.
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited
and we may not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior
preferred stock and our related dividend obligations will increase further if we receive additional draws under the Purchase
Agreement or if any dividends or quarterly commitment fees payable under the Purchase Agreement are not paid in cash.
The amounts payable for dividends on the senior preferred stock are substantial and will have an adverse impact on our
financial position and net worth.
The payment of dividends on our senior preferred stock in cash reduces our net worth. For periods in which our
earnings and other changes in equity do not result in positive net worth, draws under the Purchase Agreement effectively
fund the cash payment of senior preferred dividends to Treasury. It is unlikely that, over the long-term, we will generate net
income or comprehensive income in excess of our annual dividends payable to Treasury, although we may experience
period-to-period variability in earnings and comprehensive income. As a result, we expect to make additional draws in future
periods.
While we are not aware of any current plans of our Conservator to significantly change our business model or capital
structure in the near-term, there are likely to be significant changes beyond the near-term that we expect to be decided by the
Obama Administration and Congress.
The Purchase Agreement includes significant restrictions on our ability to manage our business, including limiting the
amount of indebtedness we can incur and capping the size of our mortgage-related investments portfolio. While the senior
preferred stock is outstanding, we are prohibited from paying dividends (other than on the senior preferred stock) or issuing
equity securities without Treasury’s consent.
The Purchase Agreement has an indefinite term and can terminate only in limited circumstances, which do not include
the end of the conservatorship. The Purchase Agreement therefore could continue after the conservatorship ends. Treasury
has the right to exercise the warrant, in whole or in part, at any time on or before September 7, 2028.
Purchase Agreement Covenants
The Purchase Agreement provides that, until the senior preferred stock is repaid or redeemed in full, we may not,
without the prior written consent of Treasury:
• declare or pay any dividend (preferred or otherwise) or make any other distribution with respect to any Freddie Mac
equity securities (other than with respect to the senior preferred stock or warrant);
• redeem, purchase, retire or otherwise acquire any Freddie Mac equity securities (other than the senior preferred stock
or warrant);
• sell or issue any Freddie Mac equity securities (other than the senior preferred stock, the warrant and the common
stock issuable upon exercise of the warrant and other than as required by the terms of any binding agreement in effect
on the date of the Purchase Agreement);
• terminate the conservatorship (other than in connection with a receivership);
• sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value: (a) to a limited
life regulated entity (in the context of a receivership); (b) of assets and properties in the ordinary course of business,
consistent with past practice; (c) in connection with our liquidation by a receiver; (d) of cash or cash equivalents for
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