Freddie Continues Shrinking Footprint with Risk-Sharing Bonds

Freddie Mac has priced its second Structured Agency Credit Risk (STACR) offering.  The debt notes are priced at $630 million and follow its initial $500 million offering that closed in July.

STACR is a new series of bond offerings introduced by the company to spread out some of its portfolio risk.  They are different from other Freddie Mac securities and debt issues in that the periodic principal and ultimate principle paid to investors is determined by the performance of a very large and diversified reference pool behind the notes.  This may provide a more stable and predictable performance and limit investor uncertainty by utilizing a pre-defined calculated severity feature.  The STACR notes don't impact the To Be Announced (TBA) market.

The current offering, designated Series 2013 DN2 has a reference pool of more than 145,500 residential loans, representing an unpaid principal balance of approximately $35.3 billion.   This pool consists of a subset of 30-year fixed-rate single-family mortgages acquired by Freddie Mac in the first quarter of 2013.

DN2 was priced in two classes.  The M-1 tranche was priced at the one-month LIBOR plus a spread of 145 basis points.  Pricing for the M-2 tranche was one month LIBOR plus a spread of 425 basis points. The offering was oversubscribed and is scheduled to settle on Nov. 12, 2013. Freddie Mac holds the senior risk and the first loss risk in reference pool, and a portion of the risk in the M-1 and M-2 classes. 

The M-1 class was rated Baa1 by Moody's and BBB-(sf) by Fitch, subject to ongoing monitoring.  The M-2 class is not rated. Both classes have an exchangeable feature giving investors the option to either combine pro-rata portions of the cash flows from the M-1 and M-2 tranches or to strip off a portion of the interest from either one to create bonds with different margins. 

"STACR is part of Freddie Mac's strategy to share credit risk with private investors while also fostering an agency credit market," said David Lowman, executive vice president of single-family business for Freddie Mac. "With two successful STACR offerings under our belt, we are well on our way to having a scalable offering with regular issuances. We are pleased with the markets' acceptance of these bonds."

Series 2013-DN2 were offered to the market by Barclays Capital as co-lead manager and sole bookrunner. Morgan Stanley also served as co-lead manager. Nomura, RBS and Wells Fargo served as co-managers.