Freddie Mac 2008 Annual Report Download - page 229

NOTE 9: STOCKHOLDERS’ EQUITY (DEFICIT)
Purchase Agreement
On September 7, 2008, we, through FHFA, in its capacity as Conservator, and Treasury entered into the Purchase
Agreement. The Purchase Agreement was subsequently amended and restated on September 26, 2008, and Treasury
Secretary Geithner announced additional changes to be made to the Purchase Agreement on February 18, 2009. Pursuant to
the Purchase Agreement, on September 8, 2008 we issued to Treasury one million shares of senior preferred stock with an
initial liquidation preference equal to $1,000 per share (for an aggregate liquidation preference of $1 billion), and a warrant
for the purchase of our common stock. The terms of the senior preferred stock and warrant are summarized in separate
sections below. We did not receive any cash proceeds from Treasury as a result of issuing the senior preferred stock or the
warrant.
The senior preferred stock and warrant were issued to Treasury as an initial commitment fee in consideration of the
commitment from Treasury to provide funds to us under the terms and conditions set forth in the Purchase Agreement. In
addition to the issuance of the senior preferred stock and warrant, beginning on March 31, 2010, we are required to pay a
quarterly commitment fee to Treasury. This quarterly commitment fee will accrue from January 1, 2010. The fee, in an
amount to be mutually agreed upon by us and Treasury and to be determined with reference to the market value of
Treasury’s funding commitment as then in effect, will be determined on or before December 31, 2009, and will be reset
every five years. Treasury may waive the quarterly commitment fee for up to one year at a time, in its sole discretion, based
on adverse conditions in the U.S. mortgage market. We may elect to pay the quarterly commitment fee in cash or add the
amount of the fee to the liquidation preference of the senior preferred stock.
The Purchase Agreement provides that, on a quarterly basis, we generally may draw funds up to the amount, if any, by
which our total liabilities exceed our total assets, as reflected on our GAAP balance sheet for the applicable fiscal quarter
(referred to as the deficiency amount), provided that the aggregate amount funded under the Purchase Agreement may not
exceed the maximum amount of Treasury’s commitment. The Purchase Agreement provides that the deficiency amount will
be calculated differently if we become subject to receivership or other liquidation process. The deficiency amount may be
increased above the otherwise applicable amount upon our mutual written agreement with Treasury. In addition, if the
Director of FHFA determines that the Director will be mandated by law to appoint a receiver for us unless our capital is
increased by receiving funds under the commitment in an amount up to the deficiency amount (subject to the maximum
amount that may be funded under the agreement), then FHFA, in its capacity as our Conservator, may request that Treasury
provide funds to us in such amount. The Purchase Agreement also provides that, if we have a deficiency amount as of the
date of completion of the liquidation of our assets, we may request funds from Treasury in an amount up to the deficiency
amount (subject to the maximum amount that may be funded under the agreement). Any amounts that we draw under the
Purchase Agreement will be added to the liquidation preference of the senior preferred stock. No additional shares of senior
preferred stock are required to be issued under the Purchase Agreement.
Issuance of Senior Preferred Stock
Pursuant to the Purchase Agreement described above, 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 terms set forth in 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.
Treasury, as the holder of the senior preferred stock, is entitled to receive, when, as and if declared by our Board of
Directors, cumulative quarterly cash dividends at the annual rate of 10% per year on the then-current liquidation preference
of the senior preferred stock. The initial dividend was paid in cash on December 31, 2008 at the direction of the Conservator
for the period from but not including September 8, 2008 through and including December 31, 2008 in the aggregate amount
of $172 million. If at any time we fail to pay cash dividends in a timely manner, then immediately following such failure
and for all dividend periods thereafter until the dividend period following the date on which we have paid in cash full
cumulative dividends (including any unpaid dividends added to the liquidation preference), the dividend rate will be 12% per
year.
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
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