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Freddie forgiven as juicy spread woos euro buyers

After a year's exile from the euro market while investors came to terms with its accounting problems, Freddie Mac returned this week with a generously priced 10 year bond that achieved a highly successful sale, even though Freddie is still a long way from its former credit standing.

Eager buyers showered the bookrunners with Eu10.5bn of orders for the deal, enabling ABN Amro, Credit Suisse First Boston, Dresdner Kleinwort Wasserstein and Morgan Stanley to increase it from Eu3.5bn to Eu4bn.

"We wanted to price the deal on Wednesday to beat the Chinese New Year," said Louise Herrle, head of debt funding at Freddie Mac, "but with the speed the book built, we would have had to price it on Wednesday anyway to stop it getting out of hand, whether there was a holiday or not."

Freddie reported its strongest book yet in euros, with around 70 new investors from a total of 270 in the book.

The EuroReference Note was priced at 19bp over mid-swaps — a spread more associated with double-A banks than a triple-A US agency. KfW and EIB trade at around mid-swaps flat in 10 years and Fannie Mae, which only funds in dollars, is trading at about 14bp over.

But the pricing rationale — 1bp-2bp outside Freddie's old 10 year deal — was no more stringent than what the market has demanded from other issuers this year.

The strong demand showed that investors see value in US agencies at this level.

Indeed, the rest of Freddie's euro curve tightened while the new paper was being marketed, and the agency market also showed good momentum in dollars.

The roster of investors included some middle-market German accounts that may have been attracted by the switch out of Landesbank paper, although the leads said that only about 6% of the deal was done on asset swaps.

The euro deal was scheduled for last September, but was delayed as soon as the mandate had been announced. In October, Freddie again put off publishing its results, pushing the deal back from the November issuing window.

In the event, the deal came almost exactly a year after Freddie announced, on January 22, 2003, that it would have to release its yearly accounts unaudited. The agency had been due to price a Eu3.5bn five year bond the next day, but postponed it until the following week, when it was a huge success and was increased to Eu4bn.

But the investigation into Freddie's accounting problems dragged on and claimed the careers of two CEOs before results were finally published.

Although the problems were related to the timing of income reporting and not directly to credit quality, they created uncertainty and raised questions about Freddie's corporate governance and future profitability. The agency therefore deemed it prudent to skip the optional windows in its calendar for EuroReference Notes.

Freddie Mac has since altered its calendar, and now makes quarterly announcements about its funding plans. Herrle reported, however, that investors were not concerned about the loss of predictability.

Teams from Freddie Mac visited 70 investors in 15 countries to market the deal, reassuring them that it remained committed to the euro market. In the end, though, Freddie Mac tempted investors by offering a generous spread over its peers, and the possibility of performance.

"We had been out of the euro market for some time," Herrle said. "The curve is illiquid and the pricing is a little bit stickier, so we wanted to err on the side of making the deal attractive and wanted to make sure the investors had a positive experience."

In a US presidential election year there is unlikely to be any damaging regulatory interference from Congress, so the next 12 months should allow the US agencies to make up some lost ground against swaps. 

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