Fannie, Freddie Rise On Citigroup Analysis

Bloomberg News
Wednesday, August 27, 2008

Shares of Freddie Mac and Fannie Mae rose after Citigroup analysts said they have enough capital to last through the year and as the companies' pace of mortgage-related purchases slowed.

Fannie advanced for a fourth day, climbing 43 cents, or 8.3 percent, to $5.62 on the New York Stock Exchange. Freddie gained 68 cents, or 20.7 percent, to $3.97. The companies declined to near-20-year lows last week on concern that they need more capital to weather the worst housing slump since the Great Depression. Shares of both companies are down more than 85 percent in the past year.

McLean-based Freddie and District-based Fannie can withstand losses through the end of the year and still keep a cushion above their minimum requirements, according to slides accompanying a conference call by Citigroup analysts yesterday.

Freddie will have $12.7 billion of capital above the minimum requirement, according to the Citigroup slides. Fannie will have $20.3 billion. Fannie will generate $7.5 billion of revenue in the second half, compared with $1.5 billion of expenses. Freddie will have $5.5 billion of revenue and expenses of $1.2 billion.

"They can absorb fairly significant credit costs between now and the end of this year without having to add additional capital," Citigroup analyst Bradley Ball said on the call with investors. If the credit markets worsen more than Citigroup anticipates "there's a pretty good chance they will have to tap the market for additional capital, if not end of this year, sometime in 2009."

Freddie Mac said yesterday that its mortgage portfolio expanded at a 9.8 percent annualized rate to $798.2 billion in July, the slowest since March. The holdings may shrink this month, according to the company's monthly volume summary. Fannie expanded to $758 billion, an annual rate of 14.4 percent, the smallest increase since April.

Separately yesterday, Standard & Poor's cut the preferred stock ratings of Fannie Mae and Freddie Mac three grades, to the lowest investment-quality ranking.

The rating was reduced to BBB- from A-, S&P said. The subordinated debt was cut to BBB+ from A-. S&P affirmed the company's AAA senior debt rating.

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