In an unusual move, Fannie Mae has obtained credit ratings for eight previously unrated tranches of five Connecticut Avenue Securities transactions (CAS) issued between 2012, when the program was launched, and 2015.
CAS are a type of credit linked note that Fannie Mae uses to offload the risk of residential mortgages it insures. The notes are unsecured general obligations, but their performance is linked to that of a pool of securitized mortgages. If too many mortgages default, CAS investors could forego interest or principal.
Since the program’s inception, Fannie has obtained investment grade ratings for some of the less risky, M1 tranches issued in these transactions. That’s because these notes appealed to investors whose investment guidelines precluded them from buying unrated debt. However the initial investors in the M2 tranches were largely indifferent to credit ratings, so it was not in Fannie’s interest to pay for one.
Fannie Mae itself retains the riskiest slice of CAS, which get hit with the first 30 basis points or so of losses sustained on referenced mortgages. The M2 tranches incur the next level of losses, which depending on the particular deal, can start anywhere from 30 to 75 basis points.
The potential investor base for these riskier notes had expanded, prompting Fannie to seek a credit rating on junior mezzanine tranches of new deals at the beginning of this year.
Fitch Ratings has assigned ratings ranging from ‘B+’ to ‘BB+’ to the M2 tranches of the series 013-C01, series 2014-C01, series 2014-C02, 2 series 2014-C03, and series 2015-C01.
It’s unusual for an issuer to obtain a credit rating on securities that it has already sold. The immediate benefit accrues to current holders, who can unload them more easily.
“A lot of investors are repeat investors, so if we add liquidity to their existing positions, it’s helpful to the market overall,” explains Laurel Davis, Fannie Mae’s vice president, credit risk transfer.
“Attracting new investors is a way to help them exit their investments and free up space [in their portfolios] for new issuance,” she said.
For now, Fannie is only engaging Fitch to rate previously unrated notes. While it has engaged other ratings agencies, including Moody’s Investors Service, on CAS, the company feels that, for now, a single rating is sufficient to boost liquidity in outstanding M2 notes, Davis said.
There’s already a fairly active market for CAS; some $2 billion to $3 billion change hands each month; and most of the trading is in M2 notes. M1 notes have a much shorter duration and investors tend to hold them to maturity.