Brother, can you spare $5 billion?
Even for Fannie Mae, a $9 billion earnings knock is material, especially when set against “only” $22 billion in stockholder book equity, so Fannie Mae has announced that it will raise another $5 billion by selling preferred stock.
Fannie Mae, moving to shore up its capital, said yesterday it will sell $5 billion in preferred stock in a private placement to large investors. The preferred stock sale, the single largest amount of equity capital ever raised by the company, would cure Fannie’s immediate problem of being “significantly under-capitalized” for regulatory purposes, a designation given to Fannie last week after the Securities and Exchange Commission’s chief accountant told the company to restate its financial results, effectively wiping out $9 billion in capital.
The equity sale is being managed by Don Marron of Lightyear Capital. The former boy wonder CEO who charged up Paine Webber during the Seventies and Eighties until its eventual merger/ sale to UBS, Marron now runs a private equity firm and is, coincidentally, a Fannie Mae director; he seems eminently well suited to this challenge. Even this equity infusion, which in all likelihood will be quickly subscribed, will not get Fannie Mae where it needs to be:
“This placement of preferred stock is a key component of Fannie Mae’s capital restoration plan,” Marron said in a statement. “We will be finalizing the details of the capital plan shortly.”
Of interest is that Fannie is moving with a private placement of preferred stock:
Fannie chose to issue the preferred stock through what is known as a “144A” offering, in which only sophisticated institutions or wealthy investors are allowed to buy the stock. Such offerings are exempt from the time-consuming and costly process of registering the shares with the Securities and Exchange Commission, in which the terms and potential risks to ordinary investors are outlined in great detail in a formal prospectus. A [Rule] 144A offering has the benefit of speed, allowing Fannie to show its regulator and the public that it has ready access to capital.
All of this suggests that Fannie felt it had to move very quickly:
“This will get them above the regulatory minimum,” said Edwin Groshans, head of mortgage finance at New York investment bank Fox-Pitt, Kelton. “But they still have a capital shortfall they will have to cure.” …Groshans said the company needs to offer higher dividends to attract buyers in the face of its regulatory scrutiny and its immediate need to raise capital.
Why might Fannie Mae have wanted to act fast?
Some analysts have worried that OFHEO could order a halt to Fannie’s common stock dividend to preserve the company’s capital.
