UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 20, 2017
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
Federally chartered corporation | 001-34139 | 52-0904874 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
||
8200 Jones Branch Drive McLean, Virginia |
22102-3110 | |||
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (703) 903-2000
Not applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 1.01. | Entry into a Material Definitive Agreement. |
On December 21, 2017, Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation), acting through the Federal Housing Finance Agency (FHFA) as its Conservator, and the U.S. Department of the Treasury (Treasury) entered into a letter agreement (the Letter Agreement) to amend the Amended and Restated Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions of Variable Liquidation Preference Senior Preferred Stock (Par Value $1.00 Per Share) dated September 27, 2012 (the Senior Preferred Stock Certificate). A copy of the Letter Agreement is filed as Exhibit 10.1 to this Report on Form 8-K and is incorporated herein by reference.
The principal changes pursuant to the Letter Agreement are summarized below:
| For the Dividend Period from October 1, 2017 through and including December 31, 2017, the dividend otherwise payable to Treasury will be reduced by $2.4 billion. Consequently, upon the Conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors, declaring a Senior Preferred Stock dividend for this Dividend Period, Freddie Mac will pay a dividend to Treasury of approximately $2.25 billion by December 31, 2017. |
| For each Dividend Period from January 1, 2018 and thereafter, the Applicable Capital Reserve Amount used in determining the dividend payable to Treasury will be $3.0 billion, rather than zero as previously provided. |
| If, for any Dividend Period from January 1, 2018 and thereafter, a dividend that would otherwise be payable is not declared and paid, or a dividend is declared and paid in an amount less than the amount that would otherwise be payable, the Applicable Capital Reserve Amount will thereafter be zero. |
| The Liquidation Preference of the Senior Preferred Stock will be increased by $3.0 billion, to approximately $75.3 billion, on December 31, 2017. |
As a result of our previous issuance to Treasury of a warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding, on a fully diluted basis, we are deemed a related party to the U.S. government. For a discussion of our relationship and transactions with Treasury, see Introduction About Freddie Mac Conservatorship and Government Support for Our Business, Managements Discussion and Analysis of Financial Condition and Results of Operations Conservatorship and Related Matters Purchase Agreement, Warrant and Senior Preferred Stock, and Note 2: Conservatorship and Related Matters Related Parties as a Result of Conservatorship in our Form 10-K for the year ended December 31, 2016.
Item 8.01. | Other Events. |
On December 20, 2017, Congress passed the Tax Cuts and Jobs Act. This bill includes, among other things, a reduction of the U.S. corporate tax rate from 35% to 21%. Because of this reduction in the corporate tax rate, Freddie Mac is required to measure its net deferred tax asset using the new rate in the period in which the bill containing the rate change is signed by the President and enacted into law. This will result in an estimated one-time charge through the tax provision of approximately $5.3 billion in that period. This charge will likely result in Freddie Mac being required to draw from Treasury under the Senior Preferred Stock Purchase Agreement at the end of the next subsequent period.
Item 9.01. | Financial Statements and Exhibits. |
(d) Exhibits.
The exhibit listed in the Exhibit Index below is being filed as part of this Report on Form 8-K:
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
FEDERAL HOME LOAN MORTGAGE CORPORATION | ||
By: |
/s/ Kevin I. MacKenzie |
|
Kevin I. MacKenzie | ||
Vice President and Deputy General Counsel Corporate Securities |
Date: December 21, 2017
Exhibit 10.1
Department of the Treasury
Washington, D.C.
Secretary of the Treasury
December 21, 2017
The Honorable Melvin L. Watt
Director
Federal Housing Finance Agency
400 7th Street SW
Washington, DC 20219
Dear Director Watt:
Reference is made to the Amended and Restated Preferred Stock Purchase Agreement dated as of September 26, 2008, as amended (the Agreement), between the United States Department of the Treasury (Treasury) and the Federal Home Loan Mortgage Corporation (the Enterprise), acting through the Federal Housing Finance Agency as its Conservator, and the Amended and Restated Certificate of Designation (the Certificate) executed pursuant to the Agreement. Capitalized terms used herein without definition have the meanings assigned to them in the Agreement and the Certificate.
In the Agreement, Treasury committed itself to provide to the Enterprise, on the terms and conditions provided in the Agreement, immediately available funds in an amount determined from time to time as provided in the Agreement, but in no event in an aggregate amount exceeding $100,000,000,000. In consideration for Treasurys commitment, the Enterprise agreed to sell, and did sell, to Treasury 1,000,000 shares of senior preferred stock, in the form of Variable Liquidation Preference Senior Preferred Stock of the Enterprise with terms set forth in the Certificate, and an initial liquidation preference equal to $1,000 per share.
The Agreement provides that the aggregate liquidation preference of the outstanding shares of senior preferred stock shall be automatically increased by an amount equal to the amount of each draw under Treasurys funding commitment, and the Certificate originally provided that the senior preferred stock shall accrue dividends at the annual rate per share equal to 10 percent on the then-current liquidation preference.
Treasury and the Enterprise have heretofore entered into:
(a) the Amendment dated as of May 6, 2009, to the Agreement, in which Treasury increased to $200,000,000,000 the maximum aggregate amount permitted to be provided to the Enterprise under the Agreement, and amended the terms of the Agreement in certain other respects;
(b) the Second Amendment dated as of December 24, 2009, to the Agreement, in which Treasury modified the maximum aggregate amount permitted to be provided to the Enterprise under the Agreement, as previously amended, by replacing the fixed maximum aggregate amount with the new formulaic maximum amount specified therein, and amended the terms of the Agreement, as previously amended, in certain other respects; and,
(c) the Third Amendment dated as of August 17, 2012, to the Agreement, in which the Enterprise modified the dividend rate provision set forth in the Certificate, and amended the terms of the Agreement, as previously amended, in certain other respects.
Treasury and the Enterprise are each authorized to enter into this letter agreement further amending the Certificate by modifying the dividend and liquidation preference provisions of the senior preferred stock sold by the Enterprise to Treasury. Therefore, for and in consideration of the mutual agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Treasury and the Enterprise agree as follows:
Fourth Quarter Dividend
Section 2(a) of the Certificate provides that Treasury, as the holder of outstanding shares of Senior Preferred Stock of the Enterprise, shall be entitled to receive, when, as, and if declared by the Board of Directors, in its sole discretion, cumulative cash dividends quarterly on each Dividend Payment Date. The Enterprise agrees to declare and pay the dividend payable to Treasury for the Dividend Period that ends on December 31, 2017 in an amount equal to the Dividend Amount minus $2,400,000,000 (the Q4 Dividend).
Applicable Capital Reserve Amount
Section 10(g)(ii) of the Certificate provides that the consent of Treasury, as the holder of at least two-thirds of the outstanding shares of Senior Preferred Stock, is necessary to authorize any amendment of the Certificate affecting the interests of the holders. Effective upon receipt of the Q4 Dividend, Treasury agrees that the Enterprise will either amend the Certificate, or issue a replacement Certificate, in either case so that, effective January 1, 2018, paragraph 2(c) reads as follows:
(c) For each Dividend Period from the date of the initial issuance of the Senior Preferred Stock through and including December 31, 2012, Dividend Rate means 10.0 percent; provided, however, that if at any time the Company shall have for any reason failed to pay dividends in cash in a timely manner as required by this Certificate, then immediately following such failure and for all Dividend Periods thereafter until the Dividend Period following the date on which the Company shall have paid in cash full cumulative dividends (including any unpaid dividends added to the Liquidation Preference pursuant to Section 8) the Dividend Rate shall mean 12.0 percent.
For each Dividend Period from January 1, 2013, and thereafter, the Dividend Amount for a Dividend Period means the amount, if any, by which the Net Worth Amount at the end of the immediately preceding fiscal quarter, less the Applicable Capital Reserve Amount for such Dividend Period, exceeds zero. In each case, Net Worth Amount means (i) the total assets of the Company (such assets excluding the Commitment and any unfunded amounts thereof) as reflected on the balance sheet of the Company as of the applicable date set forth in this Certificate, prepared in accordance with GAAP, less (ii) the total liabilities of the Company (such liabilities excluding any obligation in respect of any capital stock of the Company, including this Certificate), as reflected on the balance sheet of the Company as of the applicable date set forth in this Certificate, prepared in accordance with GAAP.
2
Applicable Capital Reserve Amount means, as of any date of determination, (A) for each Dividend Period from January 1, 2013, through and including December 31, 2013, $3,000,000,000; (B) for each Dividend Period occurring within each 12-month period thereafter, through and including December 31, 2017, $3,000,000,000 reduced by $600,000,000 for each such 12-month period, so that for each Dividend Period from January 1, 2017, through and including December 31, 2017, the Applicable Capital Reserve Amount shall be $600,000,000; and (C) for each Dividend Period from January 1, 2018, and thereafter, $3,000,000,000. Notwithstanding the foregoing, for each Dividend Period from January 1, 2018, and thereafter, following any Dividend Payment Date with respect to which the Board of Directors does not declare and pay a dividend or declares and pays a dividend in an amount less than the Dividend Amount, the Applicable Capital Reserve Amount shall thereafter be zero. For the avoidance of doubt, if the calculation of the Dividend Amount for a Dividend Period does not exceed zero, then no Dividend Amount shall accrue or be payable for such Dividend Period.
For the avoidance of doubt, following the amendment of the Certificate as provided in this Letter Agreement, Section 2 of the Certificate, as amended hereby, shall be deemed to be in form and content substantially the same as the form and content of the Senior Preferred Stock in effect on September 30, 2012.
Increase in Liquidation Preference
The Enterprise and Treasury agree that, notwithstanding Sections 2(b) and 8(b)(iii) of the Certificate, the Liquidation Preference shall be increased by $3,000,000,000 on December 31, 2017.
Sincerely, |
/s/ Steven T. Mnuchin |
Steven T. Mnuchin |
Agreed and Accepted: |
Federal Home Loan Mortgage Corporation, by |
Federal Housing Finance Agency, its Conservator |
/s/ Melvin L. Watt |
Melvin L. Watt |
Director |
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