Freddie Mac 2014 Annual Report Download - page 199

194 Freddie Mac
Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges
As shown in “Table 11.1 — Changes in AOCI by Component, Net of Tax,” the total AOCI related to derivatives
designated as cash flow hedges was a loss of $0.8 billion and $1.0 billion at December 31, 2014 and 2013, respectively,
composed of deferred net losses on closed cash flow hedges. Closed cash flow hedges involve derivatives that have been
terminated or are no longer designated as cash flow hedges. Fluctuations in prevailing market interest rates have no effect on
the deferred portion of AOCI relating to losses on closed cash flow hedges.
The previously deferred amount related to closed cash flow hedges remains in our AOCI balance and will be recognized
into earnings over the expected time period for which the forecasted transactions affect earnings, unless it is deemed probable
that the forecasted transactions will not occur. Over the next 12 months, we estimate that approximately $166 million, net of
taxes, of the $0.8 billion of cash flow hedge losses in AOCI at December 31, 2014 will be reclassified into earnings. The
maximum remaining length of time over which we have hedged the exposure related to the variability in future cash flows on
forecasted transactions, primarily forecasted debt issuances, is 19 years.
Issuance of Senior Preferred Stock
Pursuant to the Purchase Agreement described in “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS,” we
issued one million shares of senior preferred stock to Treasury on September 8, 2008. The senior preferred stock was issued to
Treasury in partial consideration of Treasury’s commitment to provide funds to us under the Purchase Agreement.
Shares of the senior preferred stock have a par value of $1, and have a stated value and initial liquidation preference
equal to $1,000 per share. The liquidation preference of the senior preferred stock is subject to adjustment. Dividends that are
not paid in cash for any dividend period will accrue and be added to the liquidation preference of the senior preferred stock. In
addition, any amounts Treasury pays to us pursuant to its funding commitment under the Purchase Agreement and any quarterly
commitment fees that are not paid in cash to Treasury nor waived by Treasury will be added to the liquidation preference of the
senior preferred stock. As described below, we may make payments to reduce the liquidation preference of the senior preferred
stock in limited circumstances. As discussed in “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS — Purchase
Agreement,” the quarterly commitment fee has been suspended.
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. Total dividends paid in cash
during 2014, 2013, and 2012 at the direction of the Conservator were $19.6 billion, $47.6 billion, and $7.2 billion, respectively.
See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” for a discussion of our net worth sweep dividend.
The senior preferred stock is senior to our common stock and all other outstanding series of our preferred stock, as well
as any capital stock we issue in the future, as to both dividends and rights upon liquidation. The senior preferred stock provides
that we may not, at any time, declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or
make a liquidation payment with respect to, any common stock or other securities ranking junior to the senior preferred stock
unless: (a) full cumulative dividends on the outstanding senior preferred stock (including any unpaid dividends added to the
liquidation preference) have been declared and paid in cash; and (b) all amounts required to be paid with the net proceeds of
any issuance of capital stock for cash (as described in the following paragraph) have been paid in cash. Shares of the senior
preferred stock are not convertible. Shares of the senior preferred stock have no general or special voting rights, other than
those set forth in the certificate of designation for the senior preferred stock or otherwise required by law. The consent of
holders of at least two-thirds of all outstanding shares of senior preferred stock is generally required to amend the terms of the
senior preferred stock or to create any class or series of stock that ranks prior to or on parity with the senior preferred stock.
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment set
forth in the Purchase Agreement; however, we are permitted to pay down the liquidation preference of the outstanding shares of
senior preferred stock to the extent of: (a) accrued and unpaid dividends previously added to the liquidation preference and not
previously paid down; and (b) quarterly commitment fees previously added to the liquidation preference and not previously
paid down. In addition, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding, the net
proceeds of the issuance must be used to pay down the liquidation preference of the senior preferred stock; however, the
liquidation preference of each share of senior preferred stock may not be paid down below $1,000 per share prior to the
termination of Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay
down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in part. If, after
termination of Treasury’s funding commitment, we pay down the liquidation preference of each outstanding share of senior
preferred stock in full, the shares will be deemed to have been redeemed as of the payment date.
The table below provides a summary of our senior preferred stock outstanding at December 31, 2014.
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