Freddie Mac 2014 Annual Report Download - page 165

160 Freddie Mac
Purchase Agreement and Warrant
Overview
On September 7, 2008, we, through FHFA, in its capacity as Conservator, entered into the Purchase Agreement with
Treasury. The Purchase Agreement was subsequently amended and restated on September 26, 2008, and further amended on
May 6, 2009, December 24, 2009, and August 17, 2012. The amount of available funding remaining under the Purchase
Agreement was $140.5 billion as of December 31, 2014. This amount will be reduced by any future draws.
The Purchase Agreement requires Treasury, upon the request of the Conservator, to provide funds to us after any quarter
in which we have a negative net worth (that is, our total liabilities exceed our total assets, as reflected on our GAAP balance
sheet). In addition, the Purchase Agreement requires Treasury, upon the request of the Conservator, to provide funds to us if the
Conservator determines, at any time, that it will be mandated by law to appoint a receiver for us unless we receive these funds
from Treasury. In exchange for Treasury’s funding commitment, we issued to Treasury, as an aggregate initial commitment fee:
(a) one million shares of Variable Liquidation Preference Senior Preferred Stock (with an initial liquidation preference of $1
billion), which we refer to as the senior preferred stock; and (b) a warrant to purchase, for a nominal price, shares of our
common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the
time the warrant is exercised, which we refer to as the warrant. We received no other consideration from Treasury for issuing
the senior preferred stock or the warrant.
Treasury, as the holder of the senior preferred stock, is entitled to receive quarterly cash dividends, when, as and if
declared by our Board of Directors. Through December 31, 2012, the senior preferred stock accrued quarterly cumulative
dividends at a rate of 10% per year. However, under the August 2012 amendment to the Purchase Agreement, the fixed
dividend rate was replaced with a net worth sweep dividend beginning in the first quarter of 2013.
For each quarter from January 1, 2013 through and including December 31, 2017, the dividend payment will be the
amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable
Capital Reserve Amount, exceeds zero. The term Net Worth Amount is defined as: (a) the total assets of Freddie Mac
(excluding Treasury’s commitment and any unfunded amounts thereof), less; (b) our total liabilities (excluding any obligation
in respect of capital stock), in each case as reflected on our consolidated balance sheets prepared in accordance with GAAP. If
the calculation of the dividend payment for a quarter does not exceed zero, then no dividend will accrue or be payable for that
quarter. The applicable Capital Reserve Amount was $2.4 billion for 2014, will be $1.8 billion for 2015, and will be reduced by
$600 million each year thereafter until it reaches zero on January 1, 2018. For each quarter beginning January 1, 2018, the
dividend payment will be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal
quarter exceeds zero. The amounts payable for dividends on the senior preferred stock could be substantial and will have an
adverse impact on our financial position and net worth. 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. However,
pursuant to the August 2012 amendment to the Purchase Agreement, for each quarter commencing January 1, 2013, and for as
long as the net worth sweep dividend provisions remain in form and content substantially the same, no periodic commitment
fee under the Purchase Agreement will be set, accrue or be payable. Treasury had previously waived the fee for all prior
quarters.
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and
we will not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior preferred
stock 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 (this quarterly commitment fee has been
suspended). We may need to make additional draws in future periods due to a variety of factors that could adversely affect our
net worth.
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. However,
Treasury's consent is required for a termination of conservatorship other than in connection with receivership. Treasury has the
right to exercise the warrant, in whole or in part, at any time on or before September 7, 2028.
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