Obtaining a credit rating for its inaugural issue of risk-sharing bonds appears to have paid off for Fannie Mae.
The government-sponsored enterprise priced its $675 million deal at much narrower spreads than a similar deal issued by sister agency Freddie Mac in July.
Both Fannie's Connecticut Avenue Securities Series 2013-C01 and Freddie's Structured Agency Credit Risk (STACR) notes are unsecured obligations whose performance is linked to the credit risk of a reference pool of mortgages insured by the respective GSEs. Both sold two mezzanine tranches that stand to lose principal if enough of the loans in the reference mortgage pools become delinquent.
But Fannie's M1 tranche, which was rated BBB- by Fitch Ratings, priced late Tuesday at 200 basis points over one-month LIBOR; and its M-2 tranche priced at one month LIBOR plus 525 basis points.
By comparison, Freddie's M1 tranche, which was unrated, priced at Libor plus 340 basis points and its M2 tranche priced at Libor plus 715 basis points -- though both tranches subsequently narrowed in secondary trading.
Fannie vice president Laurel Davis told participants on a conference call this morning that the Connecticut Avenue transaction was modeled on Freddie's STACR in order to promote the liquidity of both programs. At the same time, she said, "the structure was different enough to allow us to test different features and determine investor preferences."
One of those preferences was a credit rating. "We feel (that) having an investment grade rating opened up our investor base; we did see a wider variety of accounts” than Freddie’s STACR transaction, Davis said. “That was the feedback after Freddie’s transaction, investors felt that a rating would promote secondary trading, liquidity.”
About 75 broadly-diversified investors participated in the offering, including asset managers, mutual funds, pension funds, hedge funds, insurance companies, banks, and REITs. By comparison, 50 or so investors participated in Freddie's STACR transaction.
Fannie Mae retained the first loss and senior piece of the Connecticut Avenue structure, as well as a vertical slice of the M1 and M2 tranches, in order to align its interests with investors throughout the life of the deal.
Bank of America Merrill Lynch was the lead structuring manager and joint bookrunner; Credit Suisse was the co-lead manager and joint bookrunner. Co-managers included Barclays, Morgan Stanley, and RBS, and CastleOak Securities participated as a selling group member.
The amount of periodic principal and ultimate principal paid on the bonds will be determined by the performance of a large and diverse reference pool of more than 112,000 single-family mortgages with an outstanding unpaid principal balance of $27 billion. This reference pool consists of a random selection of eligible loans acquired in the third quarter of 2012. The loans included in the first C-deal transaction are fixed rate, generally 30-year term, fully amortizing mortgages with loan-to-value ratios between 60% and 80%.
While the end of the year is not the best time to be in the market, David said Fannie Mae is already working on another transaction that will come to market early next year. The scale of issuance will depend on the goals the FHFA sets, but the GSE expects to issue on a regular basis.
Speaking on the same conference call, Andrew BonSalle, Fannie's executive vice president for single-family underwriting, pricing, and capital markets, elaborated on the GSE's decision to use a structure similar to Freddie's STACR. "We do like the synthetic nature of the Connecticut Avenue program, it doesn’t interfere with the whole eco system," such as lender origination, the to-be-announced market for mortgages, he said.
BonSalle said Fannie opted to structure the deal as straight debt, rather than as a credit-linked note, because changes arising from Dodd-Frank made issuing credit-linked notes less attractive. But he said the GSE has been working with the Commodities Futures Trading Commission and "at some point in the future we will likely see a more traditional credit-linked note."
The cash flows and structure of such deals would be similar to those of the Connecticut Avenue program, but the notes would be issued by a special purpose vehicle, rather than by Fannie Mae, he said.
