May 6 (Bloomberg) -- Fannie Mae, after cutting its dividend and reporting a wider-than-expected loss, is marketing $2 billion of convertible preferred stock at a coupon of 8.75 percent to 9.25 percent, according to a person familiar with the offering.

The non-cumulative shares may pay a conversion premium of 18 percent to 22 percent, said the person, who declined to be identified because terms aren't set. The securities must be converted into common shares within three years. Washington-based Fannie Mae, the largest U.S. mortgage-finance company, said it plans to raise a total of $6 billion, including from sales of non-convertible preferred stock and common shares.

Fannie Mae, which owns or guarantees one of every five U.S. home loans, needs new capital to weather credit and derivative losses that rose fivefold to $8.9 billion last quarter. The government-chartered firm's regulator today said it will loosen capital restrictions once Fannie Mae raises the $6 billion.

``That'll be somewhat expensive for shareholders,'' said Gary Gordon, an analyst at Portales Partners LLC in New York. ``Their returns on new capital raised at these low stock prices aren't that attractive, but they're using it to create more demand for mortgage debt which the country needs.''

Fannie Mae rose $2.52, or 8.9 percent, to $30.81 today in New York Stock Exchange composite trading. The shares have plunged 50 percent in the past year.

Raising Capital

Financial companies, after reporting $318.8 billion in writedowns and credit losses, are raising capital by selling everything from perpetual preferred shares to hybrids to fixed- rate bonds. Sales of corporate debt by banks and financial firms total $99.4 billion so far this quarter, compared with $61.9 billion in the same period last year and $124.3 billion in all of the first quarter, Bloomberg data show.

Citigroup Inc., the biggest U.S. bank by assets, has sold $18.3 billion of debt this quarter, including $6 billion of hybrid bonds that pay a coupon of 8.4 percent for the first 10 years. Second-ranked Bank of America Corp. has raised $12.7 billion issuing notes and hybrid bonds, which offer a dividend of 8.125 percent for 10 years before switching to a floating rate.

Fannie Mae hired JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. to manage the sales of convertible preferred stock and common shares, which are scheduled to take place after the markets close on May 8, the person said. The convertibles will be non-callable and include takeover and dividend protection.

Ratings Action

Fitch Ratings said it may cut Fannie Mae's preferred stock rating to A+ from AA- after the company announced the offering and the dividend reduction. Moody's Investors Service lowered its outlook on Fannie Mae's preferred stock to negative.

``While Fitch views the prospect of incremental capital and dividend reduction positively, the proportion of preferred stock to total capital may grow higher from already elevated levels,'' the New York-based ratings company said in a statement. ``As a result, Fitch believes that preferred shareholders could absorb higher losses as their proportion of total capital increases.''

The proposed yield on Fannie Mae's offering compare with the 7.5 percent dividend U.S. bank Wachovia Corp. pays on $4.03 billion of perpetual convertible preferred shares it sold in April, Bloomberg data show. Lehman Brothers Holdings Inc., the fourth-largest securities firm, sold $4 billion of preferred shares on April 1 that pay a coupon of 7.25 percent and are convertible to stock when Lehman shares reach $49.87.

More Capital

Fannie Mae's sale of common stock will be about $2 billion and had a filing price of $28.29, the person said. The size and underwriters on Fannie Mae's sale of non-cumulative non- convertible preferred stock have yet to be determined.

``They probably have to raise that much due to the level of losses not only sustained now, but what is to come, which is reflective of the state of the industry,'' said Vivek Tawadey, head of credit portfolio strategy at BNP Paribas SA. ``By no means are the housing problems over given levels of excess inventory and significantly tighter credit conditions.''

The company, which sold $7 billion of preferred stock in December, may need as much as $15 billion to cope with delinquencies and foreclosures, analysts including Paul Miller of Friedman, Billings, Ramsey & Co. in Arlington, Virginia, said.

The preferred stock that Fannie Mae sold in December is trading at $24.90 cents, or about par, to yield 8.39 percent, according to data compiled by Bloomberg.

Fannie Mae plans to use proceeds from the latest sale to enhance its capital position, provide more market liquidity, pursue new business opportunities and for other general purposes, according to the person.

The company said its first-quarter net loss was $2.19 billion, or $2.57 a share. Analysts were expecting a loss of 64 cents a share, the average of 12 estimates from a Bloomberg survey. The dividend is being lowered to 25 cents a share from 35 cents. It had already been cut from 50 cents last year.

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: May 6, 2008 18:29 EDT