Fannie Mae Prices Inaugural C-Deal

WASHINGTON, DC-Fannie Mae priced its first offering in its C-deals series – aka its Connecticut Avenue Securities platform that it began marketing last month. The $675 million note offering priced on Tuesday and will be settled on Oct. 24. The loans included in the first C-deal transaction are fixed rate, generally 30-year term, fully amortizing mortgages with LTV ratios between 60% and 80%.

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 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.

Tuesday's offering is the first in a series of planned C-deal transactions.

The purpose of this new deal series--a variation of which Freddie Mac launched in July--is to address the Federal Housing Finance Agency's mandate in its the 2013 Conservatorship Scorecard for the GSEs to farm out some of the risk in their portfolios. Under the structure Fannie Mae sells off some of the default risk to private investors. These securities are based on loans that were underwritten "using strict credit standards and enhanced risk controls" that were implemented by the GSEs post-housing crisis.

For investors the key difference between a C-deal and other Fannie Mae securities and debt issuances is this: in a C-deal they may experience a full a partial loss of their initial principal investment, depending upon the credit performance of the mortgage loans in the related reference pool. The performance of this pool will also determine the amount of periodic principal and ultimate principal paid by Fannie Mae. This reference pool consists of more than 112,000 single-family mortgage loans, acquired in the third quarter of 2012, with an outstanding unpaid principal balance of $27 billion.

By contrast, when Fannie Mae issues fully guaranteed single-family MBS, it retains all of the credit risk associated with losses on the underlying mortgage loans, receiving a guaranty fee in return. When issuing credit risk sharing securities, Fannie Mae transfers some of the retained credit risk to investors in exchange for sharing a portion of the guaranty fee payments.

"We are excited to bring this inaugural deal to the market, and are encouraged by the broad and diverse investor demand," says Andrew Bon Salle, executive vice president for underwriting, pricing and capital markets at Fannie Mae in a prepared statement. "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."

Bank of America Merrill Lynch was the lead structuring manager and joint bookrunner on Fannie Mae's inaugural C-deal and acted as advisor to Fannie Mae on the development of the program. Credit Suisse was the co-lead manager and joint bookrunner. Co-managers included Barclays, Morgan Stanley, and RBS, and CastleOak Securities participated as a selling group member.