Fannie, Freddie Subordinated Debt May Be Cut by S&P

[flashl]

(Update2)

Bloomberg

By Dawn Kopecki and Shannon D. Harrington

July 25 (Bloomberg) -- Standard & Poor's may downgrade the subordinated bonds of Fannie Mae and Freddie Mac, surprising investors who had anticipated the securities would be supported by any Treasury rescue plan.

The potential cut would affect $19.2 billion of AA- rated subordinated debt at Fannie Mae and Freddie Mac, according to data compiled by Bloomberg. The cost to protect the bonds from default rose for the first time in three days. S&P said it may also cut $26 billion of preferred stock, pushing down the securities in New York trading. The AAA ratings on the companies' senior debt were affirmed with a stable outlook.

New legislation authorizing a backstop of the mortgage- finance companies leaves it up to the Treasury Secretary to decide whether to honor preferred dividend payments or to repay subordinated bondholders before the government, S&P analyst Victoria Wagner said in a telephone interview. That "ambiguity" casts a cloud over the ratings, she said. Once analysts have fully analyzed the final legislation, the ratings may be cut one or two levels, she said.

"We had factored in some federal support for these securities, but now I think the financial risks are now outweighing support and have to be reflected in the rating,'' Wagner said.

Read:

Making Sense Out of S&P's GSE Ratings (PDF)

The Myth and the Reality
March 2001

S&Ps “Risk to the Government” Rating:

Despite assertions by both GSEs to the contrary, it is questionable that the new S&P rating truly reflects the financial of the GSEs without its GSE status and without any tie to the U.S. government. While the recent S&P rating has not been made public, a similar S&P risk to the government rating that was issued in 1997 in response to requests from OFHEO and Congressman Baker was released. The 1997 S&P rating gave both companies AA- ratings, like the ratings that were just issued. Importantly, however, these ratings overstated their financial strength because they took into account the fact that the federal government is the implied guarantor of their debts. In the words of S&P:

Both companies maintain capital levels that are relatively low when compared with what Standard and Poor’s would expect to see at fully private companies with similar risk profiles at the “AA-“ rating level.

[skoalyman]

1. things could go off the deep end come Monday when the market opens

:nuke: :scared: