Freddie Mac:$3 Billion 5Y Issue First Without Concession Since Crisis

Freddie Mac's (FRE) $3 billion five-year reference note could mark the return to the pre-crisis way of doing business for the government-owned mortgage giant.

According to Freddie Mac, the deal is the first that didn't offer concessions to investors that made the new debt more attractive than debt already outstanding.

"This is our first deal... that we haven't offered a new issue concession to the deals outstanding," said Devajyoti "Doc" Ghose, vice president of debt portfolio management at Freddie. "There wasn't as much a need to offer it, and we got the three billion."

Since the beginning of the credit crisis, Freddie Mac and other so-called agencies have had to offer rich risk premiums to attract enough investors to their offerings. Simultaneously the Federal Reserve has been making a market in the agency sector, creating essentially a buyer of last resort.

The result was something of a flipper's market.

"The game was to buy it (the debt) at concession and then sell it into the Fed if you needed to," said Margaret Kerins, a managing director for agency debt at RBS Greenwich Capital. "I think that was driving demand in the market."

On Wednesday, Freddie decided to take a stand, saying they would issue the notes at five basis points below Libor, a key benchmark rate, very near where comparable notes were trading in the secondary market. The price talk was a signal that with lower funding needs for the immediate future, Freddie was going to play tough.

"Earlier in the year, investors would say wow that looks like a steal, I'll buy the whole thing; that's not what we're looking for," Ghose said. "We're looking for a quality book that performs well in the secondary" market, implying fewer flippers.

The $3 billion deal was relatively small for the mortgage giant, which hasn't bought as many mortgages as rates have come down. The company uses its debt issuance to purchase mortgages for its own investment portfolio as part of its mandate to support the U.S. mortgage market.

With fewer funding needs and continued thawing in the debt markets, Freddie Mac decided to chance the higher offer.

Initially, investor response was weaker. But the market sold off overnight and yields rose. Freddie raised its offer to match those higher yields, bringing investors back to the table. The deal ended up oversubscribed, though not as massively as the previous offerings, according to Kerins.

However, Ghose admitted that as markets continue to be volatile, Freddie reserves the right to offer further concessions in the future.

- By Andrew Edwards, Dow Jones Newswires; 212-416-2228; [e-mail]