Freddie Mac 2008 Annual Report Download - page 29

cash or cash equivalents; or (e) to the extent necessary to comply with the covenant described below relating to the
reduction of our mortgage-related investments portfolio beginning in 2010;
• incur indebtedness that would result in our aggregate indebtedness exceeding 110% of our aggregate indebtedness as
of June 30, 2008 (which Treasury has committed to increase correspondingly to the increase in the limit on our
mortgage assets discussed below), calculated based primarily on the carrying value of our indebtedness as reflected on
our GAAP balance sheet;
• issue any subordinated debt;
• enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or
• engage in transactions with affiliates unless the transaction is (a) pursuant to the Purchase Agreement, the senior
preferred stock or the warrant, (b) upon arm’s length terms or (c) a transaction undertaken in the ordinary course or
pursuant to a contractual obligation or customary employment arrangement in existence on the date of the Purchase
Agreement.
The Purchase Agreement also provides that we may not own mortgage assets in excess of: (a) $850 billion on
December 31, 2009 (which Treasury has committed to increase to $900 billion), based on the carrying value of such assets
as reflected on our GAAP balance sheet; or (b) on December 31 of each year thereafter, 90% of the aggregate amount of our
mortgage assets as of December 31 of the immediately preceding calendar year, provided that we are not required to own
less than $250 billion in mortgage assets.
In addition, the Purchase Agreement provides that we may not enter into any new compensation arrangements or
increase amounts or benefits payable under existing compensation arrangements of any named executive officer (as defined
by SEC rules) without the consent of the Director of FHFA, in consultation with the Secretary of the Treasury.
We are required under the Purchase Agreement to provide annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K to Treasury in accordance with the time periods specified in the SEC’s rules. In
addition, our designated representative (which, during the conservatorship, is the Conservator) is required to provide quarterly
certifications to Treasury concerning compliance with the covenants contained in the Purchase Agreement and the accuracy
of the representations made pursuant to the agreement. We also are obligated to provide prompt notice to Treasury of the
occurrence of specified events, such as the filing of a lawsuit that would reasonably be expected to have a material adverse
effect. As of March 10, 2009, we believe we were in compliance with the covenants under the Purchase Agreement.
Warrant Covenants
The warrant we issued to Treasury includes, among others, the following covenants: (a) our SEC filings under the
Exchange Act will comply in all material respects as to form with the Exchange Act and the rules and regulations
thereunder; (b) we may not permit any of our significant subsidiaries to issue capital stock or equity securities, or securities
convertible into or exchangeable for such securities, or any stock appreciation rights or other profit participation rights;
(c) we may not take any action that will result in an increase in the par value of our common stock; (d) we may not take any
action to avoid the observance or performance of the terms of the warrant and we must take all actions necessary or
appropriate to protect Treasury’s rights against impairment or dilution; and (e) we must provide Treasury with prior notice of
specified actions relating to our common stock, such as setting a record date for a dividend payment, granting subscription or
purchase rights, authorizing a recapitalization, reclassification, merger or similar transaction, commencing a liquidation of the
company or any other action that would trigger an adjustment in the exercise price or number or amount of shares subject to
the warrant.
As of March 10, 2009, we believe we were in compliance with the covenants under the warrant.
Lending Agreement Covenants
The Lending Agreement includes covenants requiring us, among other things:
• to maintain Treasury’s security interest in the collateral, including the priority of the security interest, and take actions
to defend against adverse claims;
• not to sell or otherwise dispose of, pledge or mortgage the collateral (other than Treasury’s security interest);
• not to act in any way to impair, or fail to act in a way to prevent the impairment of, Treasury’s rights or interests in
the collateral;
• promptly to notify Treasury of any failure or impending failure to meet our regulatory capital requirements;
• to provide for periodic audits of collateral held under borrower-in-custody arrangements, and to comply with certain
notice and certification requirements;
26 Freddie Mac