Fannie Mae 2014 Annual Report Download - page 32

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commitment under the agreement solely by reason of our being in conservatorship, receivership or other insolvency
proceeding, or due to our financial condition or any adverse change in our financial condition.
The senior preferred stock purchase agreement provides that most provisions of the agreement may be waived or amended by
mutual written agreement of the parties; however, no waiver or amendment of the agreement is permitted that would decrease
Treasury’s aggregate funding commitment or add conditions to Treasury’s funding commitment if the waiver or amendment
would adversely affect in any material respect the holders of our debt securities or guaranteed Fannie Mae MBS.
In the event of our default on payments with respect to our debt securities or guaranteed Fannie Mae MBS, if Treasury fails
to perform its obligations under its funding commitment and if we and/or the conservator are not diligently pursuing remedies
in respect of that failure, the holders of our debt securities or Fannie Mae MBS may file a claim in the United States Court of
Federal Claims for relief requiring Treasury to fund to us the lesser of (1) the amount necessary to cure the payment defaults
on our debt and Fannie Mae MBS and (2) the lesser of (a) the deficiency amount and (b) the maximum amount that may be
funded under the agreement less the aggregate amount of funding previously provided under the commitment. Any payment
that Treasury makes under those circumstances will be treated for all purposes as a draw under the senior preferred stock
purchase agreement that will increase the liquidation preference of the senior preferred stock.
Senior Preferred Stock
Pursuant to the senior preferred stock purchase agreement, we issued one million shares of senior preferred stock to Treasury
on September 8, 2008 with an aggregate initial liquidation preference of $1.0 billion. The stock’s liquidation preference is
subject to adjustment. For any dividend period for which dividends are payable, to the extent that dividends are not paid in
cash they will accrue and be added to the liquidation preference. In addition, any amounts Treasury pays to us pursuant to its
funding commitment under the senior preferred stock purchase agreement and any quarterly commitment fees that are either
not paid in cash to Treasury or not waived by Treasury will be added to the liquidation preference. Accordingly, the aggregate
liquidation preference of the senior preferred stock was $117.1 billion as of December 31, 2014.
Treasury, as holder of the senior preferred stock, is entitled to receive, when, as and if declared, out of legally available funds,
cumulative quarterly cash dividends. Pursuant to the August 2012 amendment to the agreement, beginning in 2013, the
method for calculating the amount of dividends for each quarter was changed from an annual rate of 10% per year on the
then-current liquidation preference of the senior preferred stock to an amount determined based on our net worth as of the
end of the immediately preceding fiscal quarter. Our net worth as defined by the agreement is the amount, if any, by which
our total assets (excluding Treasury’s funding commitment and any unfunded amounts related to the commitment) exceed our
total liabilities (excluding any obligation in respect of capital stock), in each case as reflected on our balance sheet prepared
in accordance with GAAP. The new dividend payment provision is referred to as a “net worth sweep” dividend provision. For
each dividend period from January 1, 2013 through and including December 31, 2017, the dividend amount will be the
amount, if any, by which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital
reserve amount. The capital reserve amount was $3.0 billion for dividend periods in 2013, decreased to $2.4 billion for
dividend periods in 2014 and further decreased to $1.8 billion for dividend periods in 2015. The capital reserve amount will
continue to be reduced by $600 million each year until it reaches zero on January 1, 2018. For each dividend period
beginning in 2018, the dividend amount will be the entire amount of our net worth, if any, as of the end of the immediately
preceding fiscal quarter. As a result of these dividend payment provisions, when we have quarterly earnings that result in a
net worth greater than the applicable capital reserve amount, we will pay dividends to Treasury in the next quarter; but if our
net worth does not exceed the applicable capital reserve amount as of the end of a quarter, then we will not be required to
accrue or pay any dividends in the next quarter. See “Risk Factors” for a discussion of the risks relating to our dividend
obligations to Treasury on the senior preferred stock.
The senior preferred stock ranks ahead of 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 (1) 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 (2) 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.