Freddie Mac seized a market opportunity on Tuesday to announce that it would begin a public offering of common stock to help it reach new growth targets for its mortgage portfolio.
"Freddie is one of the few companies that can issue common stock because the stock is up," said Thomas O'Donnell, senior analyst for Salomon Smith Barney. Throughout the recent turmoil, analysts saw Fannie Mae and Freddie's stocks as defensive, placing them among the few financial services stocks able to weather economic downturns.
But investors sold off Freddie's stock Tuesday, after the government- sponsored enterprise said it would offer 15 million shares of its common stock. Wall Street saw the additional shares as "dilutive" and ignored the positive long-term implications of the new issue, Mr. O'Donnell said. He said the move will be good for earnings, capital management, and stock- price appreciation.
Freddie's stock was not alone in the selloff, though, as investors engaged in profit-taking from financial services stocks throughout the day. Fannie Mae's stock, for example, fell 1.06% on Tuesday, to $70.0625.
Freddie Mac expects the stock offering to occur within the next week and a half, said John P. Gibbons, executive vice president and chief financial officer.
"We think this is a very good time to be adding to our capital base to achieve some needed flexibility," Mr. Gibbons said. "We continue to see huge volumes and foresee huge volumes in the mortgage market."
Freddie will use about half of the nearly $900 million in proceeds from its first "follow-on" sale to buy back $450 million in callable preferred stock, which will lower the percentage of preferred stock to 22%, from 30%, Mr. O'Donnell said.
The rest of the proceeds will go toward expanding the mortgage portfolio.
Freddie had estimated 1998 net retained mortgage portfolio growth to be about $50 billion, but it now estimates growth of up to $80 billion. For 1999, Freddie predicts it will have net retained portfolio growth of up to $45 billion.
Salomon Smith Barney raised its estimates in response to Freddie's announcement. The 12-month target price was raised to $67, from $65, the 1999 earnings per share estimate was raised to $2.70, from $2.67, and initial 2000 estimates were raised to $3.06, from $3, Mr. O'Donnell said.
Despite some fragility in the fixed-income markets, Mr. Gibbons said, Freddie has a positive outlook bolstered by low interest rates, very high mortgage application rates, and a very strong housing market. Freddie used the strong refinancing wave at the beginning of 1998 as an opportunity to grow, he said, and it expects to ride the current wave into the beginning of 1999.
