Fannie Mae shares rise on stock sale announcement

Thu Dec 30, 2004 03:46 PM ET

By Mark Wilkinson

BOSTON, Dec 30 (Reuters) - U.S. mortgage finance giant Fannie Mae's announced sale of $5 billion in preferred stock boosted the company's share price as investors showed appetite for the offering in spite of recent bookkeeping problems.

The sale to institutional investors was agreed upon to comply with regulators' demands that the company increase capital following an accounting controversy and criticism that it was below its minimum capital requirement.

"(Fannie Mae) has a lot of issues it needs to work on and when you're undercapitalized regulators have a lot to say," said Ed Groshans, an analyst at Fox-Pitt, Kelton. "Take them out from under that umbrella and when you're back above (the minimum capital requirement) it lifts some concern and pressures from regulators."

While Fannie Mae (FNM) 's debt is not guaranteed by the government, many investors believe there is an implicit guarantee due to the nature of the charter.

This, Groshans said, may make investors, which he said could include big mutual funds, pensions funds and insurance companies, more secure to take the leap.

"They are picking this share at attractive rates and have their concerns mitigated," he said.

Looking ahead, this investor appetite may help weed out some doubts about the company's future health.

"There was a lot of interest for it and this is a step in the right direction to restoring investor confidence," said Doug Christopher, a senior analyst at Crowell, Weedon & Co. "It is not diluting to current shareholders and it eliminates speculation that the company is in dire straits. Fannie Mae remains very strong and its importance is immense."

The decision by Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight, to approve its December preferred stock dividend was a further step toward rebuilding confidence.

Fannie Mae announced the sale on Wednesday, eight days after the embattled Franklin Raines stepped down as chief executive and Timothy Howard as finance chief.

The resignations came after financial regulators exposed accounting errors that will force Fannie Mae to restate 3-1/2 years of earnings, resulting in a multibillion-dollar shortfall.

And much remains to be done, said Groshans, as Fannie Mae agreed in September to boost its capital to 30 percent over minimum. Still about $7.5 billion short of that, he said it was unlikely the company would meet the requirement by the June 2005 deadline.

Fannie Mae is the largest buyer of U.S. home mortgages, which it either keeps or repackages as securities for sale to investors. It said $2.5 billion of the new securities would be outright preferred shares and the rest convertible shares.

Convertible securities are hybrids that usually offer current income and can be converted into company stock. Shares often fall after a company announces a convertible sale because some investors sell the underlying common stock short, and conversion may dilute that stock.

Fannie Mae stock rose 1.7 percent in afternoon trading to $71.56 per share.