Freddie Mac listed a new class of preferred stock Wednesday on the New York Stock Exchange.
The secondary market purchaser of home loans issued 5 million shares of variable-rate, noncumulative shares in November, with an initial dividend rate of 5.97% through Dec. 31, 2004. Freddie said it raised $250 million through the offering. As of Thursday, the shares had not been traded.
The new shares are the latest addition to what is becoming an alphabet soup of Freddie preferred stock. The Big Board lists B, C, D, F, G, H, K, and the new L shares. A spokesman for Freddie said its issues also include E, I, and J shares, but these are not publicly traded.
Fannie Mae, Freddie's larger competitor in the secondary market, has only reached the letter C in preferred stock listed on the New York exchange. Its D and E shares are not listed because in each case the issues were sold to only one investor, said Jonathan D. Roman, vice president for corporate finance at Fannie Mae.
Preferred stock pays investors dividends at a predetermined rate. Investors get their dividends prior to holders of common stock and also come first if assets are liquidated. Preferred stock usually does not carry voting rights.
Freddie has issued $500 million of preferred stock this year, a spokesman said, outpacing Fannie's $150 million, Mr. Roman said. Freddie began issuing preferred stock in 1992 and has $2.93 billion outstanding. Fannie began its program in 1996 and has $1.3 billion outstanding.
So why does Freddie have so many classes of preferred stock? It is seeking a mixture of common and preferred capital that is "optimal for supporting the growth in our business," a spokesman said.
PaineWebber analyst Gary Gordon said preferred stock offers Fannie and Freddie two advantages: It counts as capital, and it lets the companies reduce their equity capital.
"If you're trying to maximize returns for common share holders, more preferred is better because you need relatively less common shares," Mr. Gordon explained. He said Freddie's strategy is probably part of an effort to restructure its capital.
Freddie may also be issuing more preferred stock because its common stock is trading at less than $50, Mr. Gordon said. Freddie's stock closed at $48.875 Thursday. Mr. Gordon said he expects to see Freddie buy back common stock this quarter.
Typically, Fannie's and Freddie's preferred shares are sold to institutional investors, such as yield funds or companies interested in the tax advantage afforded by preferred stock's dividend-received reduction, said Mr. Roman of Fannie Mae.
Preferred stock counts as core capital, along with common stock, retained earnings, and surplus, Mr. Roman said. Fannie issues its preferred stock for two reasons - to repurchase common stock and in periods when Fannie's mortgage portfolio is growing very rapidly - he said.
Issuing preferred stock is an "opportunistic" strategy that serves "as a supplement to our normal capital management policy," he said. When Fannie has the "opportunity to grow faster than expected, we'll go out and issue preferred to fuel that additional growth."
