Freddie Mac cuts dividend, slates $6 billion preferreds

NEW YORK (Reuters) - Freddie Mac (FRE.N), the second largest provider of financing for U.S. home loans, on Tuesday said it halved its quarterly dividend and will sell $6 billion in preferred stock to bolster capital in anticipation of mounting mortgage-related losses.

Freddie Mac's move to buoy its waning capital base follows $2 billion in third-quarter losses on soaring credit expenses tied to worsening credit on mortgages it owns or guarantees, and expectations the housing slump will deepen.

The company last week had warned that it may slash its dividend and further pare its investment portfolio in addition to a possible preferred stock offering.

The government-sponsored enterprise, or GSE, last week said it was aiming to raise enough capital to last through 2008.

"It's unfortunate," said Howard Shapiro, an analyst at Fox-Pitt, Kelton in New York. "It gives them the capital flexibility to continue to participate in the mortgage market. But it's not good news for common shareholders."

Freddie Mac's board on Monday approved a quarterly common stock dividend of 25 cents per share, a 50 percent drop from the previous quarter, as part of its strategy of meeting a capital surplus mandated by its regulator, the McLean, Virginia-based company said in a statement.

The capital management plan "will be used to bolster the company's capital base in light of actual and anticipated losses necessitated by" accounting requirements, Richard Syron, Freddie Mac's chief executive officer, said in the statement. That should provide enough capital to operate through the current market environment, he added.

The bulk of the perpetual preferred stock issuance, led by Lehman Brothers Holdings Inc LEH.N and Goldman Sachs Group Inc (GS.N), was being marketed on Tuesday with a coupon fixed at 8.25 percent for five years, according to sources close to the issue.

If the preferred stock issue is not redeemed after five years, the coupon would float at London interbank offered rates plus 300 basis points, sources said.

Freddie Mac also said its offering would include a small portion of convertible preferred stock.

A Goldman Sachs spokesman declined to comment. A Lehman Brothers spokeswoman had no immediate comment.

Shares of Freddie Mac fell 2.3 percent to $25.15 after the close of New York trading, when Freddie Mac made the announcements. Freddie stock earlier climbed after Reuters reported preliminary details of the preferreds.

Freddie Mac, which as one of the "most nimble" issuers can sell bonds in a day or two, appears to be taking a slower approach with the preferred stock, said Michael Kastner, head of fixed-income at Sterling Stamos Capital Management in New York, which invests $5 billion. Freddie Mac may offer investors higher yields to improve buyers' chances of gains in secondary trading, he said.

As financial markets stabilize, the deal "can get done relatively easily" at levels near early price talk around 8.6 percent, he said. "But if we have another pocket of worry, (Freddie Mac's) borrowing costs can shoot above 9 percent."

Investors on Monday expected a Freddie Mac preferred stock issue would yield between 8.5 percent and 8.75 percent, based on the recent rise in rates on existing Fannie Mae (FNM.N) and Freddie Mac issues.

Freddie Mac last sold preferred stock in September, when it raised $500 million from 20 million shares offered at $25 each at a dividend rate of 6.55 percent.

(Additional reporting by Kristina Cooke; editing by Gary Crosse)