The Federal Housing Finance Agency (FHFA) has retained Houlihan Lokey Capital Inc. as a financial advisor to assist in transitioning government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac out of conservatorship.
Houlihan Lokey will assist the FHFA developing a roadmap to deliver the GSEs back to the private sector. The roadmap will take into account “business and capital structures, market impacts and timing, and available capital raising alternatives,” the FHFA says in a release.
“Hiring a financial advisor is a significant milestone toward ending the conservatorships of the enterprises,” said Mark Calabria, director of the FHFA. “The next major milestone for FHFA is the re-proposal of the capital rule, which will happen in the near future.”
Houlihan Lokey will be paid $9 million for the first year of its rolling contract, which the FHFA can extend for an additional four and a half years, with the total contract not to exceed $45 million.
As part of the transition process, Houlihan Lokey Capital will advise the FHFA on how the companies can best raise the needed capital to back their operations – meaning an IPO. A recent Fox News report estimates that a Fannie/Freddie IPO would range between $150 billion and $200 billion, making it the largest history.
However, it should be noted that these technically wouldn’t be “IPOs,” as Fannie and Freddie began trading on the New York Stock Exchange in 1968 and 1989, respectively. Rather, the “offerings” would be 80% of the combined companies’ stock held by the federal government as of being placed into conservatorship in 2008.
How much capital the GSEs need in order to adequately shield taxpayers from another major bailout is a key question for the FHFA to consider. In September, the agency along with the Treasury announced they had jointly determined how much capital Fannie Mae and Freddie Mac would need to retain: As per “capital agreements” signed with the Treasury and FHFA, Fannie Mae was to retain $25 billion and Freddie Mac was to retain $20 billion – at least initially, as steps were taken to transition the companies out of conservatorship.
But the FHFA later walked back those agreements and announced that it would need more time to determine the proper capital structure for the companies. In December, the agency announced that it planned to re-propose the entire regulation on capital requirements for Fannie Mae and Freddie Mac “sometime in 2020.”
“The 2018 Capital Rule was proposed before FHFA began the process of retaining capital at the [GSEs] as a first step toward ending the conservatorships,” Calabria said in a December release. “In fairness to all interested parties, the comments submitted during the previous rulemaking were submitted under a different set of assumptions about the future of the [GSEs]. During the process of the rulemaking, important issues were identified that will be addressed in the re-proposal.
“The Capital Rule is one of the most important rules I will issue as director,” Calabria added. “This rule will be re-proposed and finalized within a timeline fully consistent with ending the conservatorships. Requiring the [GSEs] to build capital that can properly support their risk ensures that taxpayers will never be on the hook again during an economic downturn.”