Freddie Mac priced its first Structured Agency Credit Risk (STACR) transaction of the year. The Series 2015-DN1 was upsized to $880 million from $775 million originally.
The notes are issued at par and pay an interest rate pegged to Libor over a period of 10 years. They are general obligations of Freddie Mac, but the mortgage giant may hold on to investors’ principal if enough loans in a $27.6 billion reference pool become more than 180 days delinquent.
This transaction is the first one in which the company sold a portion of the first loss risk. Investors in the $75 million B class of notes will be paid 1150 basis points over one-month Libor for taking the first 100 basis points of loss when homeowners stop making payments on mortgages insured by the government sponsored enterprise.
Previous deals required losses to reach a threshold before the company received funds to cover them.
The B notes are unrated, restricted to U.S. persons, and will be treated as a derivative for U.S federal income tax purposes, all of which restrict the potential investor base. And since Freddie is retaining 50% of the tranche, there is only $37.5 million to go around.
Pricing for the M-3 class, which absorbs the next 150 basis points of losses (between 1.0% and 2.5%), was Libor plus 415 basis points. This class is rated Ba1 by Moody’s Investors Service.
The M-2 class, which has an attachment point of 2.5%, was Libor plus 240 basis points. This class is rated Baa1 by Moody’s and BBB by DBRS.
The M-1 class, which has an attachment point of 3.5%, was Libor plus 125 basis points. It is rated A2/A.
"This is a great start to the year," Mike Reynolds, Freddie Mac vice president of credit risk transfer, said in a press release. "This is the first time we sold a share of the first loss through STACR and we think it's a step forward in the development of the credit risk transfer market. The benchmark 2015-DN1 transaction had very strong demand with several new domestic and foreign investors."
J.P. Morgan and Citigroup served as co-lead managers and joint bookrunners for STACR Series 2015-DN1, which has a reference pool of recently-originated single-family mortgages with an unpaid principal balance of more than $27.6 billion.
The offering is scheduled to settle on or around February 3, 2015. When it does, Freddie Mac will have laid off a portion of its credit risk on more than one million loans since the program began in 2013.
The mortgage company has said it is planning for six to eight deals this year, depending on market conditions.