Freddie Mac 2010 Annual Report Download - page 202

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;
• 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 covenants also apply to our subsidiaries.
The Purchase Agreement also provides that we may not own mortgage assets with a UPB in excess of: (a) $900 billion
on December 31, 2009; or (b) on December 31 of each year thereafter, 90% of the aggregate amount of mortgage assets we
are permitted to own 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. Under the Purchase Agreement, we also may not incur indebtedness that
would result in the par value of our aggregate indebtedness exceeding 120% of the amount of mortgage assets we are
permitted to own on December 31 of the immediately preceding calendar year. The mortgage asset and indebtedness
limitations are determined without giving effect to any change in the accounting standards related to transfers of financial
assets and consolidation of VIEs or any similar accounting standard. Therefore, these limitations were not affected by our
implementation of the changes to the accounting standards for transfers of financial assets and consolidation of VIEs, under
which we consolidated our single-family PCs and certain Other Guarantee Transactions in our financial statements as of
January 1, 2010.
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 or other
executive officer (as such terms are 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.
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.
Termination Provisions
The Purchase Agreement provides that the Treasury’s funding commitment will terminate under any of the following
circumstances: (a) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment
at that time; (b) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including
mortgage guarantee obligations); and (c) the funding by Treasury of the maximum amount of the commitment under the
Purchase Agreement. In addition, Treasury may terminate its funding commitment and declare the Purchase Agreement null
and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the
Conservator or otherwise curtails the Conservator’s powers. Treasury may not terminate its funding commitment under the
Purchase 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.
199 Freddie Mac