Freddie Mac priced its inaugural $1.25 billion Reference REMIC transaction to great fanfare last week, achieving a 50% oversubscription rate for the 15-year Gold 5% backed deal. Reference REMIC R-001, class AE, a guaranteed maturity class with an April 15, 2015 final, tightened to a 74/73 bid/ask on the break, after pricing at 75 basis points over an interpolated Treasury curve. Settlement is scheduled for April 22.
Mark Hanson, vice president of mortgage funding at Freddie, cited the deal's liquidity and broad investor participation as the reasons for the deal's successful execution. The offering priced tighter than it would otherwise have, due to its unique features, such as the 17 dealers involved in the syndicate process and its pricing transparency (see ASR 4/4/2005), Hanson added. Additionally, the guaranteed final maturity appealed to asset-backed investors and limits extension risk as rates rise.
Initially expected to price last Wednesday, Reference REMIC R-001 priced a day earlier last week due to healthy demand. Most of the bonds, 78%, were sold to U.S. investors, with 21% Asian participation. In terms of investor type, 31% were investment managers, 23% insurance companies and pension funds, 18% central banks, and 17% commercial banks.
The book of orders for the transaction was predominantly for cash and not as a swap for mortgage passthroughs, Hanson added that through this deal, Freddie was able to reach a broader investor base by bringing a transparent and liquid transaction tailored to the market's needs.
Lehman Brothers, Morgan Stanley, and UBS were all joint leads on the transaction while Banc of America Securities, Bear Stearns, Citigroup Global Markets, Credit Suisse First Boston, Deutsche Bank Securities, Goldman Sachs and RBS Greenwich Capital served as co-managers. The deal also involved an additional seven underwriters in the selling group, according to a post-pricing release.
Hanson said that Freddie Mac will likely offer another $1 billion Reference REMIC on May 16, with the same dealers involved. Freddie plans to bring one to two deals per quarter for the remainder of the year.
A Freddie Mac representative said that roadshow presentations were made in 25 U.S. cities on the first week of a two-week tour and several Asian countries, including Japan, Korea, China, Hong Kong, Singapore, and Taiwan on the second week. Asian investors reportedly viewed the new REMIC program very positively with some still having issues with the lack of back office capabilities and hoping that their operations would be up and running for subsequent REMIC transactions.
In commentary about the deal, UBS compared the pricing of the new REMIC with a comparable standard CMO, FNR 05-38 CH, which was priced at the same level. Both deals have very similar average life profiles in the base case, comparable amounts of extension risk as well as identical yields. UBS said that in comparing the two deals, it seems as if investors paid nothing for the liquidity and the guaranteed final maturity. Analysts suggested that money managers who have been staying out of CMO collateral because of issues involved in dividing the bonds into small pieces for individual accounts should look at this product.
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