Preliminary Announcement of Exchange Offer

Transcription

1 We are providing this Preliminary Announcement of Exchange Offer solely to help holders and market participants prepare for Freddie Mac s impending Exchange Offer, as discussed below. This is not an offer to sell or exchange any Freddie Mac securities. If you intend to participate in the Exchange Offer, you should rely only on the information in Freddie Mac s Exchange Offer Circular when it becomes available, as it may be amended or supplemented from time to time. The Exchange Offer Circular will contain important information about the Exchange Offer. Once available, you will be able to obtain for free the Exchange Offer Circular on Freddie Mac s website, Preliminary Announcement of Exchange Offer Freddie Mac will conduct the Exchange Offer described below under the direction of its conservator and regulator, the Federal Housing Finance Agency, in furtherance of the Single Security Initiative, which is intended to increase the liquidity of the to-be-announced ( TBA ) market and to reduce the disparities in trading value between the single-class mortgage-related securities of Freddie Mac and the Federal National Mortgage Association ( Fannie Mae ). In this preliminary announcement, the holder generally refers to the beneficial owner of the applicable securities. The Exchange Offer will be conducted pursuant to an Exchange Offer Circular (as defined below), which will be provided to holders upon request on or after the commencement of the Exchange Offer. I Exchange Offer The Federal Home Loan Mortgage Corporation ( Freddie Mac ) expects to commence an Exchange Offer in May 2019, under which Freddie Mac will offer to exchange, at the option of the holder: Eligible PCs that are TBA-eligible for Freddie Mac s Uniform Mortgage-Backed Securities Mirror Certificates ( UMBS Mirror Certificates ) and applicable Float Compensation Eligible PCs that are non-tba-eligible for Freddie Mac s Mortgage-Backed Securities Mirror Certificates ( MBS Mirror Certificates ) and applicable Float Compensation Eligible Giant PCs that are TBA-eligible for Freddie Mac s Supers Mortgage-Backed Securities Mirror Certificates ( Supers Mirror Certificates ) and applicable Float Compensation Eligible Giant PCs that are non-tba-eligible for Giant Mortgage-Backed Securities Mirror Certificates ( Giant MBS Mirror Certificates ) and applicable Float Compensation Collectively, the UMBS Mirror Certificates, MBS Mirror Certificates, Supers Mirror Certificates and Giant MBS Mirror Certificates comprise the Mirror Certificates For this purpose, Eligible PCs refers to Freddie Mac s Mortgage Participation Certificates ( PCs ) that are eligible to be exchanged in the Exchange Offer and Eligible Giant PCs refers to Freddie Mac s Giant Mortgage Participation Certificates ( Giant PCs ) that are eligible to be exchanged in the Exchange Offer. Collectively, the Eligible PCs and Eligible Giant PCs comprise the Eligible Securities. January 22, 2019

2 The Exchange Offer will be upon the terms and subject to the conditions to be set forth in an exchange offer circular (as it may be supplemented and amended from time to time, the Exchange Offer Circular ). Each of the Mirror Certificates is backed by its related applicable Eligible PC or Eligible Giant PC and each of the Mirror Certificates is a pass-through certificate that represents an interest in such Eligible PC or Eligible Giant PC. Freddie Mac expects that the terms of the Mirror Certificates will be substantially identical to the terms of the Eligible Securities. The primary difference is that, for Mirror Certificates, there is a delay of 55 days between the time interest begins to accrue and the time the holder receives its interest payment. This period is referred to as a Payment Delay. For Eligible Securities, the Payment Delay is 45 days. In addition, the categories of eligible investments applicable to the Mirror Certificates are broader than those applicable to Eligible Securities issued prior to March 1, Most security characteristics of the Mirror Certificates will mirror their corresponding Eligible Securities (e.g., unpaid principal balance at issuance and current factor). However, the Mirror Certificates will have a new CUSIP number, prefix, pool number and issuance date. Freddie Mac guarantees the payment of interest and principal on the Mirror Certificates. Principal and interest payments on the Mirror Certificates are not guaranteed by, and are not debts or obligations of, the United States or any federal agency or instrumentality other than Freddie Mac. Freddie Mac alone is responsible for making payments on its guarantee. Holders who exchange portions of the same Eligible Security will receive pro rata portions of the corresponding Mirror Certificate in return. Each holder can decide to exchange his or her portion independently of other holders of the same Eligible Security. II Determining Eligibility Freddie Mac estimates that there are approximately 70,000 Eligible Securities available to be exchanged. In general, all PCs and Giant PCs with a Payment Delay of 45 days that are not 100% committed to a resecuritization may be exchanged in the Exchange Offer. An exchange of an Eligible Security for a Mirror Certificate and applicable Float Compensation will be irrevocable once the exchange has settled. Please refer to the Cumulative 45-Day to 55-Day Exchange Activity Report at for a list of all PCs and Giants PCs that are eligible to be exchanged in the Exchange Offer and their corresponding Mirror Certificates. Freddie Mac expects to update this report regularly. III Timeline Freddie Mac expects that holders may begin participating in the Exchange Offer on May 7, 2019 for settlement dates beginning on May 17, However, Freddie Mac reserves the right to delay, 2

3 postpone or cancel the Exchange Offer at any time prior to commencement. As discussed below, Freddie Mac currently expects at least one path for exchange to remain open for the foreseeable future. IV Float Compensation Freddie Mac will also pay to holders that effect exchanges of Eligible Securities for related Mirror Certificates a one-time payment (the Float Compensation ) to compensate those holders for the difference in Payment Delay between their Eligible Securities and the corresponding Mirror Certificates. As noted above, Eligible Securities have a Payment Delay of 45 days and Mirror Certificates have a Payment Delay of 55 days. Freddie Mac expects to offer a schedule of Float Compensation payment rates, with at least one payment rate for every term and coupon combination (regardless of maturity) relating to Eligible Securities. These term and coupon combinations are referred to as cohorts. For example, a cohort could consist of 30-year PCs with a 4.0% coupon or 15-year PCs with a 3.0% coupon. Coupon refers to the per annum interest rate of the PC. Freddie Mac expects to update the schedule of Float Compensation payment rates on a regular basis. Payment rates will be expressed in ticks (1 tick = 1/32 of 1%). The Float Compensation paid with respect to an Eligible Security will be calculated by multiplying (x) the payment rate then in effect for the applicable cohort by (y) the unpaid principal balance of the Eligible Security. Investors can calculate the Float Compensation that they can expect to receive upon exchange by using a calculator tool published by Freddie Mac (the Float Compensation Calculator ). An investor can enter the pool numbers or CUSIPs of the securities that the investor intends to exchange, along with the original unpaid principal balance of the investor s securities, into the Float Compensation Calculator. The calculator will return the total Float Compensation payment that the investor could expect to receive if the securities were exchanged at that time, along with a pool-by-pool breakdown of the Float Compensation value and the pool number and CUSIP of the Mirror Certificates to be received. The Float Compensation Calculator will be updated each time a new schedule of payment rates is published. The Float Compensation values provided by the calculator will provide a representation of the Float Compensation owed based on the payment schedule in effect. However, the exact value of the Float Compensation payable to a holder in any specific exchange transaction will be communicated to the holder as part of the applicable exchange confirmation. The Float Compensation Calculator is available on as is an Indicative Price Grid. These tools are intended to help holders plan for the exchange offer. The tools are described below: The Indicative Price Grid presents Float Compensation prices in ticks by term and coupon cohorts. The prices in this grid reflect what Freddie Mac would pay on the indicated effective date given then-current market conditions. 3

4 As noted above, the Float Compensation Calculator can be used by holders to determine the actual Float Compensation to be paid on their Eligible Securities, based on the most recent Indicative Price Grid. Until May 2019, when we expect the exchange offer to commence, prices presented in these tools are indicative, and presented for informational purposes only. V Two Exchange Paths Freddie Mac expects that holders of Eligible Securities will generally be able to choose between two exchange paths to effectuate exchange transactions in the Exchange Offer: The dealer-facilitated exchange path (the Dealer-facilitated Path ). Under this path, holders exchange via authorized dealers, who will submit exchange requests on behalf of holders through Freddie Mac Dealer Direct, which is an online portal owned and operated by Freddie Mac. The Dealer-facilitated Path is expected to remain open for the foreseeable future. The direct-to-freddie Mac exchange path (the Direct-to-Freddie Mac Path ). Under this path, holders exchange directly with Freddie Mac using a technology and onboarding solution developed and managed by Tradeweb Markets LLC and one or more of its affiliates (collectively, Tradeweb ) to facilitate the exchange. The Direct-to-Freddie Mac Path is expected to remain open for three to five years following the commencement of the Exchange Offer. Freddie Mac will not charge a fee to exchange any Eligible Securities in the Exchange Offer. However: If the holder s Eligible Securities are held through a broker, dealer, commercial bank, trust company or other nominee that exchanges Eligible Securities on the holder s behalf, the broker or other nominee may charge a fee or commission. Dealers may charge holders a fee to conduct exchange transactions under the Dealer-facilitated Path. Tradeweb will not charge holders a fee to conduct exchange transactions under the Direct-to- Freddie Mac Path for the three-year period beginning upon commencement of the Exchange Offer, but may do so thereafter. The transfers of securities under the exchange paths (e.g., the holder s transfer of an Eligible Security to Freddie Mac and Freddie Mac s transfer of the corresponding Mirror Certificate to the holder) will be effected by means of entries on the books and records of the Federal Reserve Bank of New York or such other Federal Reserve Banks as may, from time to time, maintain Eligible Securities and Mirror Certificates in book-entry form. 4

5 Primary Considerations Dealer-Facilitated Path Direct-to-Freddie Mac Path Counterparty Dealer Freddie Mac Delivery Delivery vs. Payment ( DVP ) to Dealer Free of Payment ( FOP ) delivery to Freddie Mac Float Compensation Exchange Booking The Float Compensation amount may be netted from the price paid by the holder for the Mirror Certificate 1 Booked by Dealers via Freddie Mac s Dealer Direct portal to settle in the current month or the following month Separate cash wire at the end of the settlement day Booked directly by holders via Tradeweb to settle in the current month only Timeline Open for the foreseeable future Open for three to five years VI Settlement Timing, Capacity and Black-out Dates Freddie Mac expects that exchange transactions booked by noon may be settled on the next business day. However, during the initial period of the Exchange Offer, the minimum time between the booking of an exchange transaction and the settlement of such transaction will be two business days. Freddie Mac expects to manage the amount of capacity available on any business day for the settlement of exchange transactions. Freddie Mac plans to limit the amount of the available daily exchange transaction capacity at the commencement of the Exchange Offer, and expects to gradually increase the available daily capacity during this initial period. Freddie Mac expects this initial period to last for three to six months, however, Freddie Mac could extend this period in its sole discretion. Exchange transactions cannot settle during (i) the first five business days of each month, (ii) the Class A and the Class B settlement dates set by the Securities Industry and Financial Markets Association or (iii) the day we set each month for dealers to deliver collateral to us for settlement under our REMIC certificates issuance program. Other business days may not be available for settlement because settlement capacity may be limited on any business day due to previously scheduled exchange transactions or for other reasons. 1 Under the DVP delivery method, an exchange transaction under the Dealer-facilitated Path would likely be structured as (x) the purchase by the dealer of the Eligible Security from the holder followed by (y) the purchase by the holder of the related Mirror Certificate from the dealer. 5

6 VII Exchange Disclosures Freddie Mac will make available on its internet website at the reports listed below. These reports relate to the exchange of Eligible Securities for Mirror Certificates and Float Compensation and enable holders and market participants to monitor the exchange transactions that occur pursuant to the Exchange Offer. Title Timing Content Daily New Issue File Each day a Mirror Certificate is issued to Freddie Mac s account at the New York Federal Reserve Bank Newly issued Mirror Certificates are included in the Daily New Issue File, which includes disclosure similar to a single pool Giant PC. The pool number for each Mirror Certificate begins with the letter Z to distinguish the Mirror Certificates from other securities issued by Freddie Mac in its regular securities offering programs. Cumulative 45-Day to 55-Day Exchange Activity Published on every business day and commenced August 10, 2018, the date Freddie Mac began to issue Mirror Certificates to its account at the New York Federal Reserve Bank This report provides the daily status of all Eligible Securities, regardless of whether any exchange activity has occurred. The report shows each Mirror Certificate and its corresponding Eligible Security. Mirror Certificates appear in the report as they are issued. Once exchange transactions begin, this report will show the cumulative exchange activity for all Eligible Securities. Daily 45-Day to 55-Day Exchange Activity Aggregate Level 1 Collateral* Exchange Activity Published on every business day beginning with the settlement of the first exchange transaction Published on every business day beginning with the settlement of the first exchange transaction This report will provide information on all exchange transactions from the preceding business day, including the original par amounts, CUSIP numbers and security identifiers of the Eligible Securities and corresponding Mirror Certificates. This report will present all exchanges settled to date at the Level 1 Collateral level. For example, the report would present an exchange of an Eligible Giant PC for a Supers Mirror Certificate as an exchange of the underlying PCs for the underlying UMBS Mirror Certificates. This report will show how much Level 1 Collateral is outstanding as PCs (i.e., securities with a Payment Delay of 45 days) and UMBS or MBS Mirror 6

7 Certificates (i.e., securities with a Payment Delay of 55 days) to facilitate calculations of supply and prepayments. Outstanding Supply Report Published monthly beginning with the settlement of the first exchange transaction This report will provide data on the available supply of 45-day Payment Delay securities (e.g., PCs) and 55-day Payment Delay securities (e.g., UMBS Mirror Certificates) on a cohort level to facilitate trading. * Level 1 Collateral refers to PCs, UMBS Mirror Certificates and MBS Mirror Certificates. VIII Exchange Offer Circular Document and Agreements The Exchange Offer will be based upon the terms and subject to the conditions to be set forth in the Exchange Offer Circular, which will be provided to holders upon request on or after the commencement of the Exchange Offer. The Exchange Offer is subject to certain risks and uncertainties. These risks and uncertainties will be described in greater detail in the section entitled Risk Factors in the Exchange Offer Circular. Before making any decision with respect to the Exchange Offer, the holder should read the Exchange Offer Circular and the Offering Circular for the Mirror Certificates, and any related supplement, together with the documents incorporated by reference in the Exchange Offer Circular. Holders interested in conducting exchange transactions under the Direct-to-Freddie Mac Path must complete a two to three week set up and approval process. 2 As part of this process, a holder will need to submit an Internal Revenue Service ( IRS ) Form W-8 or W-9 as well as such materials as may be necessary to conduct appropriate know-your-customer due diligence on the holder. The holder will also need to sign an investor exchange agreement with Freddie Mac and complete an exchange product set up process. If the holder is not already a Tradeweb user, the holder will need to sign a user agreement with Tradeweb. If the holder is not approved for the Direct-to-Freddie Mac Path, the holder will need to use the Dealer-facilitated Path. As part of the process of conducting exchange transactions under the Direct-to-Freddie Mac path, the holder will acknowledge that it has agreed to the terms of the Exchange Offer as set forth in the Exchange Offer Circular and has received a copy of the Exchange Offer Circular. The holder will also 2 To initiate this process, holders should Tradeweb at UMBS@tradeweb.com and request the onboarding package. 7

8 make certain customary representations and warranties, including, but not limited to, with respect to their Eligible Securities and the holder s eligibility to participate in the Exchange Offer. Dealers conducting exchanges through the Dealer-facilitated Path will be subject to similar requirements. In addition, a dealer may require a holder to enter into a separate agreement with the dealer for the dealer to execute exchange transactions on behalf of the holder under the Dealerfacilitated Path. Each authorized dealer will enter into a Dealer Exchange Agreement with Freddie Mac, the primary purpose of which is to establish the framework pursuant to which exchange transactions may be effected under the Dealer-facilitated Path. The dealers will not act as agent for, or otherwise on behalf of, Freddie Mac in connection with the Exchange Offer, will not be compensated in any way by Freddie Mac in connection with the effectuation of exchange transactions, will not participate in the preparation of the Exchange Offer Circular and the related disclosure materials or conduct any due diligence with respect thereto and will bear no responsibility for the contents thereof. Rather, each dealer will be acting solely on its own behalf and/or on behalf of any applicable holders when it effects exchange transactions through the Dealer-facilitated Path. IX Certain Federal Income Tax Consequences You are advised to consult your own tax advisors regarding the U.S. federal tax consequences of the exchange and Float Compensation as well as any tax consequences arising under the laws of any state, local, foreign or other taxing jurisdiction. In addition, this summary of certain federal tax consequences is for general information only and does not constitute tax advice for any holder. Freddie Mac sought guidance from the IRS on the federal income tax implications of an exchange of Eligible Securities for Mirror Certificates (the Conversion ) and the associated Float Compensation. In response to our request the IRS issued Revenue Ruling which holds that the Conversion will not constitute a taxable exchange of property. This ruling is available at: The IRS did not rule on the taxability of the associated Float Compensation payment. Freddie Mac intends to treat any Float Compensation payment as a reduction of your adjusted basis in the mortgages underlying your Mirror Certificate. As such, for those holders that execute their exchange through the Direct-to-Freddie Mac Path, Freddie Mac does not intend to report the Float Compensation payment as taxable income to the holder or subject the payment to tax withholding. However, since it is unclear how the IRS might view the Float Compensation, holders are advised to consult their own tax advisors as to the appropriate treatment of the payment. Although Freddie Mac will not perform tax withholding or reporting of the Float Compensation payments, for holders who choose to use the Direct-to-Freddie Mac Path, Freddie Mac will require submission of an IRS Form W-8 from non-u.s. holders or Form W-9 from U.S. holders. If a holder does not provide a valid W-8 or W-9, the holder will need to use the Dealer-facilitated Path and provide documents that the dealer may require. There may be situations where holders that do provide a valid 8

9 W-8 or W-9 will still be required to use the Dealer-facilitated Path. This determination will be at the sole discretion of Freddie Mac. Further, non-u.s. asset managers who seek to perform exchanges on behalf of their clients through the Direct-to-Freddie Mac Path will need to demonstrate that they are Qualified Intermediaries ( QI ). If QI status cannot be confirmed by Freddie Mac, a non-u.s. asset manager will be required to use the Dealer-facilitated Path. X Accounting for Exchanges Various factors may influence the accounting treatment applicable to a holder s exchange of Eligible Securities for Mirror Certificates and Float Compensation. Accounting standards, and the application and interpretation of such standards, are subject to change from time to time. Before exchanging Eligible Securities for Mirror Certificates and Float Compensation, holders should review the Exchange Offer Circular and are encouraged to consult their own professional advisors on the appropriate accounting treatment for Mirror Certificates and Float Compensation. However, Freddie Mac and Fannie Mae have received guidance from the SEC s Office of the Chief Accountant on how an investor may account for its exchange of Freddie Mac-issued 45-day PCs for Freddie Mac-issued 55-day Supers. This guidance is based on a hypothetical exchange effected by Fannie Mae (as an investor in Freddie Mac-issued 45-day PCs) and is memorialized in a letter from Fannie Mae to the SEC s Office of the Chief Accountant, which is available at: ment_for_gold_pc_exchanges_and_companion_document.pdf. It is Freddie Mac s understanding that the SEC s Office of the Chief Accountant, as set forth in the letter, does not object to treating the exchange of a Freddie Mac-issued 45-day PC for a Freddie Mac-issued 55- day Supers as a minor modification whereby the investor would carry-over the basis of its 45-day singleclass pass-through to the 55-day Supers, with the cash payment paid by Freddie Mac as compensation for the change in the remittance cycle recorded as an additional basis adjustment to the 55-day Supers and subsequently amortized over the remaining life of the security. * * * This is not an offer to sell any Freddie Mac securities. If you intend to participate in the Exchange Offer, you should rely only on the information in Freddie Mac s final definitive Exchange Offer Circular, as it may be amended or supplemented from time to time. We have not authorized anyone to provide you with different information. Offers for any given security are made only through applicable offering circulars and related supplements, including the Exchange Offer Circular, which incorporate Freddie Mac s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (the SEC ); all other reports Freddie Mac files with the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 ( Exchange Act ), excluding any information furnished to the SEC on Form 8-K; and all documents that Freddie Mac files with the SEC pursuant to Sections 13(a), 13(c) or 14 of the Exchange Act, excluding any information furnished to the SEC on Form 8-K. We are not making the Exchange Offer in any jurisdiction that prohibits the Exchange Offer. 9

10 The financial and other information contained in this preliminary announcement and in the documents that may be accessed in this preliminary announcement speaks only as of the date of those documents. Freddie Mac undertakes no obligation, and disclaims any duty, to update any of the information in those documents. These materials may contain forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond the company s control. Management s expectations for the company s future necessarily involve a number of assumptions, judgments and estimates, and various factors could cause actual results to differ materially from the expectations expressed in these and other forward-looking statements. These assumptions, judgments, estimates and factors are discussed in the company s Annual Report on Form 10-K for the year ended December 31, 2017, and its reports on Form 10-Q and Form 8-K, which are available on the Investor Relations page of the company s Web site at and the SEC s website at The company undertakes no obligation to update forward-looking statements it makes to reflect events or circumstances occurring after the date of this preliminary announcement. 10