McLEAN, VA—With a track record of only a year or so as a reference point, generalizing about how investors view Freddie Mac's Structured Agency Credit Risk (STACR) debt notes may be a little premature. But as the deals stack up -- Freddie Mac has done four this year including its latest $425.6 million offering, which priced on Tuesday -- it is safe to say that some trends are becoming clear.
"Investor demand for these securities are growing," Mike Reynolds, Freddie Mac vice president of Credit Risk Transfer, tells GlobeSt.com.
"We can't take too much from a deal to deal comparison, but it definitely appears that the B class has become another good investment option for our customer base," he says.
Freddie Mac started selling shares in the B class -- the unrated class -- this year. It gives investors the potential of higher yield, but also, of course, exposes them to more loss. In the last deal, 11 investors participated in the B class. This time it was 19.
More telling, at 795 basis points, the B class spreads were the tightest to date for STACR, Reynolds says. Partly that is due to the collateral underlying the deal, but it is also partly due to investor demand, he says.
Reynolds also noted that the M-3 class priced at a tight level -- 325 basis points over Libor. The M-3 class typically will get a rating but it is usually below investment grad. M-1 is typically the A-rated bond and M-2 usually has an investment grade rating.
"Overall, the deal went very smoothly," Reynolds says. "We priced just over one day after launching. That was very good and quite fast for these types of transactions."
The deal has a reference pool of single-family mortgages with an unpaid principal balance of more than $30.3 billion. The reference pool consists of a subset of 30-year fixed-rate single-family mortgages acquired by Freddie Mac in the first through third quarters of 2013 with LTVs from 80 to 95 percent.
Pricing was:
M-1 class was one-month LIBOR plus a spread of 110 basis points.
M-2 class was one month LIBOR plus a spread of 195 basis points.
M-3 class was one month LIBOR plus a spread of 325 basis points.
B class was one month LIBOR plus a spread of 795 basis points.
This transaction, STACR HQ2, was a fixed severity, not actual loss. This year, Freddie Mac has also launched a first actual loss STACR offering.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
