Reply #35: Fannie Mae Plans $5 Billion Stock Sale [View All]

http://www.washingtonpost.com/wp-dyn/articles/A35283-2004Dec29.html

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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.

On its own, however, the preferred stock sale would not increase capital enough to achieve a 30 percent surplus over Fannie's required minimum capital level. The Office of Federal Housing Enterprise Oversight, Fannie's regulator, ordered the higher capital levels in September because of what it said were accounting problems and internal control weaknesses.

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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 144a offering has the benefit of speed, allowing Fannie to show its regulator and the public that it has ready access to capital.

In a 144a, investors would probably include large mutual fund companies, banks, pension funds, large endowment funds or other institutional investors.

Groshans said a 144a offering this large is unusual but not unheard of. Fannie has good relationships with all the big Wall Street investment banks, and there will be no shortage of buyers, he predicted. According to Bloomberg data, Fannie's sale will be the largest single preferred stock sale in three years.

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