Investors continue to demand additional yield for exposure to defaults on loans insured by the Fannie Mae.
Spreads on the company's latest offering of Connecticut Avenue Securities were well wide of levels on the previous deal, completed in October; and that deal, in turn, priced wide of the previous offering in July.
CAS are general obligations of Fannie Mae but their performance is linked to a pool of fixed-rate, fully amortizing loans acquired between Jan. 1, 2015 and Feb. 28, 2015 and subsequently securitized. The deal consists of two series of notes linked to the performance of two separate pools of loans, one with loan-to-value ratios between 60% and 80% and the other with LTVs between 80% and 97%.
Pricing for the 1M-1 tranche, which is linked to the performance of a group of loans with lower loan-to-value ratios and is rated Baa3 by Moody's Investors Service and BBB by Kroll Bond Rating Agency, was one-month Libor plus a spread of 195 basis points. That's 35 basis points wide of the comparable tranche of Fannie's previous offering, completed in October, which pays one-month Libor plus 160 basis points.
Pricing for the 1M-2 tranche, rated Ba3/BB-, was one-month Libor plus a spread of 675 basis points, well wide of 570 basis points on the previous deal; pricing for the unrated 1B tranche was one-month Libor plus a spread of 1,175 basis points; pricing for the 2M-1 tranche, linked to a group of higher LTV loans and rated Baa3/BBB-, was one-month Libor plus a spread of 210 basis points; and pricing for the 2M-2 tranche, rated B1/B+, was one-month LIBOR plus a spread of 695 basis points versus 555 basis points on the previous deal.
The B tranche in group 2 was retained by Fannie.
The $945 million note offering is scheduled to settle on Feb. 18.
JPMorgan Securities was the lead structuring manager and joint bookrunner and Citigroup Inc. was the co-lead manager and joint bookrunner on this transaction. Merrill Lynch, Pierce, Fenner & Smith, Barclays Capital, Credit Suisse and Wells Fargo Securities were co-managers.
Beginning in October and continuing with this transaction, Fannie Mae shifted to an actual loss framework for Connecticut Avenue Securities transactions, in which any losses are passed through based on the realized losses of the loans following final disposition. The company enhanced its disclosure data for investors to support this new framework, and published extensive information about its credit risk management practices, with the goal of providing additional transparency.
After this transaction is completed, Fannie Mae will have completed 10 CAS deals since the program began, issued $13.4 billion in notes and transferred a portion of the credit risk to private investors on single-family mortgage loans with an outstanding unpaid principal balance of more than $467 billion.
Since 2013, Fannie Mae has transferred a portion of the credit risk on more than half a trillion dollars in single-family mortgages through all of its risk transfer programs.
In addition to the flagship CAS program, Fannie Mae continues to reduce risk to taxpayers through its Credit Insurance Risk Transfer reinsurance program and other forms of risk transfer.
"Fannie Mae continues to focus on the long-term strength and stability of our Connecticut Avenue Securities program," Laurel Davis, vice president of credit risk transfer, said in a press release.
"We continue to work to build a deeper market for credit risk and are pleased with investor participation in the program. We've built a robust set of credit risk management tools that benefit Fannie Mae and the investors in our credit risk transfers."
