Freddie Mac yesterday finished regional roadshows for its forthcoming issue of $2.4 billion of Reference Remic securities. The US housing agency had been to Singapore, Taipei, Macau, Hong Kong, Tokyo, Seoul and Beijing this week to sell the securities that will price next week.
The product is a new twist on an old theme. Traditional remics (real estate mortgage investment conduits) are just re-packaged pass-through securities. Traditional pass-throughs see both the principal and interest on US housing debt passed through to the end investors in the bonds. Remics see these cash flows repackaged so that they meet specific investor needs in terms of duration and risk class.
This has meant that traditionally remics have been small in size and not very liquid. What Freddie Mac has done with the new product is to take the usual remic product and add a number of features that will make them appeal to a broader audience, specifically Asian investors.
These new features include using an issuing syndicate to bring the deals to market, which will add liquidity. Lehman Brothers, Morgan Stanley and UBS are the top tier of the syndicate and another 15 or so banks will be added to maximize the tradability of the securities.
Secondly, the company has committed to making each reference remic deals much larger than traditional offerings. Each deal will be at least $1 billion and the first deal being sold at present will be $2.4 billion. This will make them much more liquid than traditional remics.
Freddie Mac will also commit to offering at least one or two reference remic deals per quarter, giving investors an certain predictability when it comes to making investment decisions.
Finally the bonds will be traded electronically on Tradeweb and closing prices will listed on Tradeweb and Bloomberg every day, again adding transparency to the product.
"We have had an overwhelming response to road shows and everyone has been intrigued," says Mark Hanson, a vice president of mortgage funding at Freddie Mac. "These bonds will be more liquid and more transparent and so should appeal to everyone. They are an extension of traditional remics but will improve the bid offer spread and the velocity."
Hanson says the company has been designing the new product for over a year.
As well as addressing investor concerns on liquidity, the bonds will have features boosting their credit appeal. The new issue will have a ten-year maturity, but the collateral will have 15 years average life. This gives investors protection against the risk that the bonds' duration will be extended as people slow down mortgage repayments in a rising interest rate environment.
In a way the new deal can be seen as a way for Freddie Mac to sell bonds to its global investor base based on the purest merits of its underlying cash flows, namely US mortgage payments. In this way the bonds are removed from the headline risks that have befallen US agency names - including Freddie Mac - in recent years on the back of government investigations into their accounting problems.
Still, the challenge will be getting Asian investors to buy into essentially asset backed securities in a size that has never really been achieved before. Hanson says that the targeted investor base for the new issue is traditional ABS investors, remic investors who have moved away from the product and Asian central banks, who have been buyers of mortgage pass through debt but not remics.
He says the task of hitting the Asian bid has been made easier by the fact that the majority of potential Asian investors are already holders of Freddie Mac's reference notes, two thirds of them are already participants in pass through notes and about half are investors in some form of remic.
