Freddie Mac 2014 Annual Report Download - page 44

39 Freddie Mac
• competition for debt funding from other debt issuers; and
• other market factors.
Our ability to obtain funding in the public unsecured debt markets or by pledging mortgage-related and other securities as
collateral to other institutions could cease or change rapidly, and the cost of available funding could increase significantly, due
to changes in market interest rates, market confidence, operational risks and other factors. We may incur costs, including
potentially higher funding costs, for our liquidity management practices and procedures. There can be no assurance that such
practices and procedures would provide us with sufficient liquidity to meet our ongoing cash obligations under all
circumstances. In particular, we believe that our liquidity contingency plans may be difficult or impossible to execute during a
liquidity crisis or period of significant market turmoil. If we cannot access the unsecured debt markets, our ability to repay
maturing indebtedness and fund our operations could be eliminated or significantly impaired, as our alternative sources of
liquidity (e.g., cash and other investments) may not be sufficient to meet our liquidity needs.
We make extensive use of the Federal Reserve's payment system in our business activities. The Federal Reserve requires
that we fully fund accounts at the Federal Reserve Bank of New York to the extent necessary to cover cash payments on our
debt and mortgage-related securities each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will
initiate such payments. Although we seek to maintain sufficient intraday liquidity to fund our activities through the Federal
Reserve's payment system, we have limited access to cash once the debt markets are closed for the day. Insufficient cash may
cause our account to be overdrawn, potentially resulting in penalties and reputational harm.
Prolonged wide spreads on long-term debt could cause us to reduce our long-term debt issuances and increase our
reliance on short-term and callable debt issuances. This increased reliance could increase rollover risk (i.e., the risk that we may
be unable to refinance our debt when it becomes due) and result in a greater use of derivatives. This greater use of derivatives
could increase the volatility of our comprehensive income.
Our mortgage-related investments portfolio has contracted significantly since we entered into conservatorship. A
significant portion of the assets remaining in the portfolio are those we consider to be less liquid, and our ability to use these
assets as a significant source of liquidity (for example, through sales or use as collateral in secured lending transactions) is
limited.
We pay net worth sweep dividends to Treasury on the senior preferred stock on a quarterly basis. The amount of the net
worth sweep dividend could vary substantially from quarter to quarter for a number of reasons, including as a result of non-
cash changes in net worth. It is possible that, due to non-cash increases in net worth, the amount of our dividend for a quarter
could exceed the amount of available cash, which could have an adverse effect on our financial results.
Changes in U.S. Government Support
Treasury supports us through the Purchase Agreement and Treasury’s ability to purchase up to $2.25 billion of our
obligations under its permanent statutory authority. Unlike certain of our competitors, we do not have access to the Federal
Reserve's discount window. Changes or perceived changes in the U.S. government’s support of us could have a severe negative
effect on our access to the unsecured debt markets and our debt funding costs. While we believe that the support provided by
Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the unsecured debt markets and to
have adequate liquidity to conduct our normal business activities, our access to the unsecured debt markets and the costs of our
debt funding could be adversely affected by a number of factors, including: (a) uncertainty about the future of the GSEs; (b)
debt investors' concerns that the risk of receivership is increasing; and (c) future draws that significantly reduce the amount of
available funding remaining under the Purchase Agreement. For more information, see “MD&A — LIQUIDITY AND
CAPITAL RESOURCES — Capital Resources, the Purchase Agreement, and the Dividend Obligation on the Senior Preferred
Stock.”
Demand for Debt Funding
If investor demand for our debt securities were to decrease, our liquidity, business, and results of operations could be
materially adversely affected. The willingness of domestic and foreign investors to purchase and hold our debt securities can be
influenced by many factors, including changes in the world economy, changes in foreign-currency exchange rates, regulatory
and political factors, as well as the availability of and investor preferences for other investments. If investors were to divest
their holdings or reduce their purchases of our debt securities, our funding costs could increase and our business activities could
be curtailed. The market for our debt securities may become less liquid as the size of our mortgage-related investments
portfolio declines, as we will be issuing fewer debt securities. This could lead to a decrease in demand for our debt securities
and an increase in our funding costs.
Competition for Debt Funding
We compete for debt funding with Fannie Mae, the FHLBs, and other institutions. Competition for debt funding from
these entities can vary with changes in economic, financial market, and regulatory environments. Increased competition for
debt funding may result in a higher cost to finance our business, which could negatively affect our financial results. See
“MD&A — LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Other Debt Securities” for a description of our debt
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