October 15, 2013Fannie Mae Prices First Capital Markets Risk Sharing Transaction
WASHINGTON, DC – Fannie Mae (FNMA/OTC) today announced that it priced its inaugural credit risk sharing transaction under its Connecticut Avenue Securities (C-deals) series. The Series 2013-C01 transaction provides an additional avenue to manage the credit risk on the company’s guaranty book of business. The $675 million note offering priced today and is scheduled to settle on October 24. This is the first in a series of planned C-deal offerings aimed to help reduce taxpayer risk and attract private capital to the housing market.
“We are excited to bring this inaugural deal to the market, and are encouraged by the broad and diverse investor demand,” said Andrew Bon Salle, executive vice president for underwriting, pricing and capital markets at Fannie Mae. “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. The Connecticut Avenue Securities program was structured so that it does not impact the To Be Announced (TBA) market, and is scalable and flexible enough to incorporate market feedback into future issuances.”
C-deal notes are bonds issued by Fannie Mae that protect it against credit risk. The amount of periodic principal and ultimate principal paid by Fannie Mae is determined by the performance of a large and diverse reference pool of more than 112,000 single family mortgage loans with an outstanding unpaid principal balance of $27 billion. This reference pool consists of a random selection of eligible loans acquired in the third quarter of 2012, part of Fannie Mae’s new book of business underwritten using strong credit standards and enhanced risk controls. The loans included in the first C-deal transaction are fixed rate, generally 30-year term, fully amortizing mortgages with LTV ratios between 60 percent and 80 percent.
C-deal notes are different than other Fannie Mae securities and debt issuances. When Fannie Mae issues fully guaranteed single-family MBS, it retains all of the credit (mortgage default) risk associated with losses on the underlying mortgage loans. In return, Fannie Mae receives a guaranty fee. 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. Investors in C-deals may experience a full or partial loss of their initial principal investment, depending upon the credit performance of the mortgage loans in the related reference pool.
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 broadly-diversified 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 in order to align its interests with investors throughout the life of the deal.
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.
For more information on this transaction and Fannie Mae’s approach to credit risk transfer, visit