NEW YORK - (Business Wire) Fitch Ratings has affirmed Freddie Mac's (FRE's) long-term Issuer Default Rating (IDR) at 'AAA' and has downgraded the company's preferred ratings. Fitch has also placed the 'AA-' subordinated debt and preferred stock on Rating Watch Negative.
The following rating has been downgraded and placed on Rating Watch Negative:
Freddie Mac
--Preferred stock to 'A' from 'A+'.
Today's rating action follows FRE's net loss of $972 million for the six months ended June 30, 2008 (1H'08) driven by higher than expected credit costs and the need to raise equity amid a difficult market environment.
FRE reported rising delinquency rates with more loans transitioning to foreclosure and, on a per loan basis, loss severities higher due to the languishing U.S. housing market. Such costs are above Fitch's expectations for this period and further increases will erode capital at an accelerated rate. Fitch believes the firm has sufficient capital to support losses embedded in its single family portfolio but dividend cessation for the preferred stock becomes more likely as housing prices decline. FRE's expected capital raise may meet market resistance. Composition of the issue between preferred and common may impact ratings of preferred stock. A higher dividend rate on the preferred could also result in pressure on FRE's ability to pay dividends on all preferred issues.
For the six months ended June 30, 2008 (1H'08) FRE reported a net loss of $972 million as credit related expenses continue to be a significant drag on performance. The loss included an impairment of $1.0 billion on the company's available-for-sale securities incurred for 2Q'08 related to reduced credit enhancement from a monoline, mark to market losses on the liquidity portfolio and other related securities losses. Fitch remains concerned that additional fair value losses could be classified as other-than-temporary, further reducing regulatory capital levels and perhaps impacting the valuation of deferred tax assets.
FRE's IDR and senior debt ratings reflect the high probability of external support and the company's importance to housing and the U.S. economy, a view reinforced by the Housing Bill. The Bill loosely defines the form of such support which is expected to come in the form of preferred or common equity.
Compared to 2Q'07, credit related expenses were about 6 times (x) higher, albeit from historic low levels, predominately driven by higher severity of losses and further credit deterioration in FRE's single-family credit guaranty portfolio. 2Q'08 results include a $2.5 billion provision, boosting reserves to cover approximately 2.7x annualized 2Q'08 net charge-offs.
Fitch's maintenance of FRE's preferred stock on Rating Watch Negative reflects the uncertainties surrounding credit trends and uncertainty around the timing of the expected capital issuance. Further downgrades could result from additional deterioration in credit trends or the unexpected injection of capital from the US Treasury ahead of current preferred shareholders.
Based on Fitch's internal stress testing, subordinated debt is unlikely to absorb any losses under a very severe stress. A downgrade of the subordinated debt rating could occur if capital raises are insufficient to maintain that level of cushion.
The following ratings have been affirmed:
Freddie Mac
--Long-term IDR at 'AAA';
--Short-term IDR at 'F1+';
--Support rating at '1';
--Support floor at 'AAA'.
The follow rating has been placed on Rating Watch Negative:
Freddie Mac
--Subordinated debt at 'AA-'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Vincent Arscott, CFA, +1-212-908-0872 (New York)
Eileen Fahey, +1-312-368-5468 (Chicago)
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
