S&P cuts Fannie, Freddie preferred ratings

NEW YORK, Aug 26 (Reuters) - Standard & Poor's on Tuesday said it lowered subordinated debt and preferred stock ratings of Fannie Mae and Freddie Mac on speculation the securities may not draw support of the government in a bailout of the largest U.S. mortgage funding companies.

S&P cut ratings on subordinated debt of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) to "BBB-plus" from "A-minus," and on the preferred shares to "BBB-minus" from "A-minus."

The downgrade of subordinated and preferred issues "reflects increasing uncertainty about whether government support will extend to these securities in the context of further deterioration in the asset quality of Fannie Mae's mortgage portfolio," S&P said in a statement.

Rating cuts also come as falling share prices limit the government-sponsored enterprises' (GSEs) abilities to raise capital, S&P said.

For Freddie Mac, a failure to raise $5.5 billion in capital as planned increases the likelihood the Treasury will use its new authority to support the company, S&P said. That may lead to losses for subordinated debt and preferred stock holders, the rating company added.

Angst over the the ability of Fannie Mae and Freddie Mac to withstand mortgage losses led the Treasury in July to ask for increased authority to provide cash to the companies, or take an equity stake if capital was further depleted. Views that a "nationalization" of the GSEs would take place bubbled last week but have moderated since the weekend.

The housing bill signed in July giving Treasury authority to act has only reinforced expectations that the government will act to prevent defaults on Fannie Mae's senior debt, said S&P, which affirmed the "AAA" senior ratings of both GSEs.

S&P also cut its "risk-to-the-government" ratings on the companies to "A-minus" from "A."

Ratings of non-senior debt remain on downgrade watch until clarity develops on the Treasury's intentions to support the companies, S&P said. For Freddie Mac, the negative outlook will also linger until the company outlines its capital raising.

Subordinated debt is more at risk due to the possibility that interest payments could be deferred depending on trigger events tied to the companies' regulatory capital levels, S&P said. A deferral of subordinated debt payments would lead to non-payment of preferred and common stock dividends, according to contracts, S&P added.

Moody's Investors Service downgraded the preferred stock ratings of Fannie Mae and Freddie Mac on Friday.

(Reporting by Al Yoon)