On Tuesday, Standard & Poor’s (S&P) upgraded the subordinated debt ratings on Fannie Mae (FNMA) and Freddie Mac (FMCC) by two notches to AA- from A. The upgrade was driven by government support in relieving debt of these two agencies over the last five years, along with affirmation of continuation of the same in the coming period.
However, Standard & Poor’s affirmed AA+/A-1+ long- and short-term senior unsecured debt ratings and D ratings on the preferred debt of the two agencies. Further, the ‘Stable’ rating outlook on the senior unsecured and subordinated debt remained unchanged.
Background Details
To ensure U.S. housing financial market stability, in Sep 2008, Fannie Mae and Freddie Mac was taken over by the government. The federal takeover entailed the placing of these two government sponsored enterprises (GSEs) under the U.S. Treasury.
These two firms incurred losses of $14.9 billion during the financial crisis. Therefore, to keep these GSEs operating, the U.S. Treasury and Federal Housing Finance Agency (FHFA) provided support for both senior and subordinated debt, along with agency mortgage-backed securities. Further, the Treasury suspended the subordinated debt's interest-deferral agreement and consequently paid continuous interest on the instruments despite the agencies' weakening financial position.
Notably, till date, full principal and interest of the subordinated debt continues to be paid. However, the remaining subordinated debt outstanding at both Fannie Mae and Freddie Mac will mature earliest by 2019.
Does anyone feel another upgrade awardable?
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