Fannie Mae appears to be moving quickly
to meet the goal of risk sharing set for it by its conservator the Federal
Housing Finance Agency (FHFA). The
company announced today that it had priced a $675 million note offering, the
first in a series of planned Connecticut Avenue Securities (C-deal) offerings.
The offering, designated as Series
2013-C01, is scheduled to settle on October 24.
These C-deal notes are bonds designed to protect Fannie Mae against
credit risk and are part of the company's strategy to meet FHFA's Strategic Plan goals for Fannie Mae and
Freddie Mac (the GSEs). Under that plan,
Fannie Mae is expected to transfer at least $30 billion of its single-family
mortgage risk to private sources of capital.
This was the second risk-sharing deal
announced by Fannie Mae in a week. On October
10 it said it had signed an agreement with National Mortgage Insurance
Corporation (National MI) to provide $5 billion in credit risk coverage for
certain loans acquired by the company in the fourth quarter of 2012 with
original loan to value (LTV) ratios between 70 and 80 percent.
The loans included in the first C-deal transactions
are taken from a reference pool which consists of a random selection of
eligible loans acquired by Fannie Mae in the third quarter of 2012. Fannie Mae said these loans are part of the
company's new book of business underwritten using strong new credit standards
and enhanced risk controls. The Series
2013-01 offering includes mostly 30-year fixed rate fully amortizing mortgages
with LTV ratios between 60 and 80 percent.
C-deal notes are different than other Fannie Mae securities and debt
issuances. When Fannie Mae issues fully guaranteed single-family MBS, it
retains all of the credit (mortgage default) risk associated with losses on the
underlying mortgage loans and receives a guaranty fee. With the C-deal
notes Fannie Mae transfers some of the retained credit risk to investors in
exchange for sharing a portion of the guaranty fee.
Pricing for the M-1 tranche was one-month LIBOR plus a spread of 200 basis
points. Pricing for the M-2 tranche was one month LIBOR plus a spread of 525
basis points. About 75 broadly-diversified investors participated in the
offering, including asset managers, mutual funds, pension funds, hedge funds,
insurance companies, banks, and REITs. Fannie Mae retained the first loss and
senior piece of the 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
"We are excited to bring this inaugural deal to the market, and are
encouraged by the broad and diverse investor demand," said Andrew Bon Salle,
executive vice president for underwriting, pricing and capital markets at
Fannie Mae. "By sharing risk with investors, Fannie Mae will continue to
provide much needed liquidity to the market while attracting private capital
participation in the housing market. The Connecticut Avenue Securities
program was structured so that it does not impact the To Be Announced (TBA)
market, and is scalable and flexible enough to incorporate market feedback into
FHFA's Acting Director Edward J. DeMarco said he was pleased that Fannie Mae
was nearing completion of its first Connecticut Avenue Securities transaction. "The
C-deal, and the mortgage insurance pool policy transaction that Fannie Mae
completed last week, support FHFA's 2013 Conservatorship Scorecard and FHFA's
Strategic Plan for the Enterprise Conservatorships. These transactions
demonstrate different structures for transferring credit risk to investors
thereby facilitating Fannie Mae's reduced footprint in the marketplace and
ultimately protecting investors."
Bank of America Merrill Lynch was the lead manager on the issue and Credit
Suisse was co-lead manager. Other
investment houses involved in the transaction were Barclays, Morgan Stanley,
and RBS, and CastleOak Securities participated as a selling group member.