Amount: $4bn (increased from $3bn day after launch)
Maturity: September 9, 2005
Issue price: 100.00
Coupon: three month Libor minus 3.5bp
Launched: Wednesday September 3
Joint books: Lehman Brothers, Morgan Stanley
We already issue floating rate notes but changing our style to issue a large syndicated deal was a more recent idea. We spoke to our dealer group, canvassed ideas from the market and decided to go ahead.
We have been receiving feedback that investors are getting a little more defensive. Clearly, this issue fits the bill.
There is a low risk involved for us. We already issue floating debt and we knew that it would be slightly costlier than smaller one-off trades but we have a level that we are happy to issue at. It was, however, a change in style.
About 95% was sold to the US. We had approximately 40 investors. Usually you get five or six large, chunky orders, but we had 30-40 of $25m-$100m in size. That signals that there are investors that like the product, but feel that they are not being dealt with in an equitable way in the non-syndicated process. We also had investors that bought large tickets.
The pricing was slightly expensive. We could have pushed it lower, but this was the first transaction and we wanted investors to have a good experience.
This is a long term game for us. We are going to be coming back to this market.
Banks were approximately 44% of the deal. A lot of those were security lending type institutions. Mutual funds took 18%, money managers took 20% and 10%-11% went to corporates, municipalities or similar accounts.
Lehman - This was a great transaction. We grew the deal from $3bn to $4bn. We announced it at 4bp through Libor, priced it at 3.5bp through and the bonds are now (Thursday) closing bid at 3.5bp. It could not have gone better.
This was a landmark transaction - the first time that a US agency has syndicated a floating rate note. Normally these transactions are privately placed. This transaction has brought transparency to the floating rate note market that had not previously existed.
The feedback from investors was that they would appreciate an issue with complete transparency.
Lehman Brothers is active in this market and we have a good sense of where investors would want to purchase the deal, so we went out with price talk and brought the deal in around that.
Based in the new issuance procedure for this product and the track record that Freddie Mac has for issuing debt, investors were intrigued. There was also the accompanying announcement that Freddie will again issue floaters via the syndication process in the future.
The pricing was attractive and investors were confident that there would be a time lag between this deal and the next.
Also, two year product is not easily available in the market. That said floating rate notes become more popular in a rising rate environment.
"...this is a big market that is not well defined. I give Lehman and Morgan Stanley kudos for being the first guys to pitch this and to Freddie for being the first borrower to define this market.
Corporates have been doing it with some success, but there is no developed market for GSEs (government sponsored enterprises). From an accounting perspective - and perhaps therefore a political one - floating rate notes are better than discount notes. So it is an extremely smart trade.
From a pricing point of view, 3.5bp through is pretty compelling."
"...I loved the Freddie floater. We had been looking at something like this for when rates started to turn back up. But they got there first. A great idea."