Freddie Mac May Get Risk-Sharing Notes Rated as Lessons Learned
Freddie Mac may seek credit ratings in the next offering of the firm’s new securities sharing its mortgage-default risks with investors, as it learns from the first issue and plans for another later this year.
The lack of grades on $500 million of notes sold this week “definitely detracted from a further breadth in the investor base,” Kevin Palmer, a vice president of costing and portfolio management at the government-controlled mortgage-finance company, said in a telephone interview.
While Freddie Mac first began working toward the transaction more than two years ago, it’s weighing tweaks such as the move while planning regular sales, he said.
The U.S. government may need to expand the types of buyers as it seeks to limit taxpayer risk, according to Deutsche Bank AG analyst Christopher Helwig. Freddie Mac (FMCC)’s sale was part of an effort to build a market that may produce more than $100 billion of “highly structurally levered” notes, Helwig wrote in a report yesterday. Of the bonds sold, $250 million would have straddled investment and speculative grades had they been rated, with the rest riskier, he wrote in a report.
The Treasury Department and Federal Housing Finance Agency, the regulator for the McLean, Virginia-based company and competitor Fannie Mae (FNMA), applauded the deal yesterday as a step in the right direction with government-backed mortgages accounting for more than 85 percent of new lending.
Almost 50 different buyers participated in the offering, including mutual funds, hedge funds, real-estate investment trusts, pension funds, insurers, banks and credit unions, according to Freddie Mac.
Palmer’s comments about ratings underscore that the grades remain important to some investors because of regulations and client guidelines, even after moves to reduce their weight after the 2008 financial crisis fueled by faulty rankings.
“If it had a rating, we would have been interested” in the safer bonds at the yields offered, said David Land, a money manager at St. Paul, Minnesota-based Advantus Capital Management Inc., which oversees about $26 billion.
Investors including Land said during marketing of the debt that terms that reduced the need to predict actions by servicers and the size of foreclosure losses were appealing. Structures that make it easier to understand the risks may help draw buyers that don’t typically purchase mortgage debt, Palmer said.
“We have a $10 trillion mortgage market and the GSEs are covering about half of it,” Palmer said, referring to Freddie Mac and Fannie Mae as government-sponsored enterprises. “If we want to draw more private capital into it, you have to simplify what is a complex market.”
Investors also want regular sales, according to Donna Corley, a senior vice president of credit pricing, structuring and securitization at Freddie Mac, who also worked on the deal.
“One of the common themes that we heard on the roadshow was the excitement from investors about something being programmatic and a whole new asset class coming in to the marketplace,” she said. “It’s been quite a period of time since investors have had that. We’d want to take advantage of it.”
At the same time, the company will “continue to explore other avenues” for reducing risk, Palmer said. The notes sold were direct obligations of Freddie Mac, rather than mortgage-backed securities or debt known as credit-linked notes.
CLNs involve packaging derivatives and cash-like assets into bonds. New regulations and the company’s conservatorship made it harder for Freddie Mac to use those, though it may do so in the future, he said.
While mortgage REITs can be limited in how much of either Freddie Mac’s unsecured debentures or CLNs they can buy, it helps that the corporate bonds can be counted as government debt in some of their tests under tax rules, according to Palmer.
The FHFA’s directive to Freddie Mac’ executives to try to share risk on $30 billion of loans this year wasn’t the only reason for the deal, he said. Before any push from its regulator the company started in early 2011 investigating doing an issue, after conducting a similar one in 1998, he said. It also regularly shares risk on multifamily mortgages.
Such transactions can “reduce our credit exposure when we think it’s prudent to do so,” he said.
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