Freddie Mac 2015 Annual Report Download - page 220

Financial Statements Notes to the Consolidated Financial Statements | Note 2
Freddie Mac 2015 Form 10-K 218
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 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 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. The dividends we have paid to Treasury on the senior
preferred stock have been declared by, and paid at the direction of, the Conservator, acting as successor
to the rights, titles, powers and privileges of the Board. 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 the total assets of Freddie Mac (excluding Treasury’s commitment and any unfunded amounts
thereof), less 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 $1.8 billion for 2015, will be $1.2 billion for 2016,
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. 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. We may need to make additional draws in future periods due
to a variety of factors that could adversely affect our net worth.