Freddie Mac

  • 03 Apr 2003
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Rating: Aaa/AAA/AAA

Amount: Eu500m global bond

Maturity: April 24, 2006

Issue/re-offer price: 100.00

Coupon: 2.94%

Call option: at par on 24/10/03

Spread at re-offer: 23.6bp over the 5% February 2006 Bobl 137

Launched: Tuesday April 1

Joint books: Merrill Lynch, UBS Warburg

Borrower's comment:

The deal has a one time only call on October 24 of this year.

We sold 30% into Asia, 20% went into what we were calling Eastern Europe, which is essentially Europe outside EMU, and the balance came from core Europe and the UK.

Central banks took 44%, investment managers 36%, insurance and pension funds 14%. Banks and corporates took 3%.

One interesting point about the distribution is that we were able to get new investors into Freddie Mac. On this deal, 40% of the names were new to us

This is the first time we have done a large euro callable. The short lock-out attracted a number of investors that would normally invest lower down the curve than we have previously issued in euros.

We expected quite a bit of demand from French money manager type accounts, but they did not really participate despite being a natural target for this kind of trade.

We try to encourage investors to look at this paper on an option adjusted spread basis, but realise that the market is somewhat new. The primary pricing reference was a spread to mid-swaps of 5bp over the three year mid-swap rate in euros, which is ultimately where we did price the bonds. Our January 2006 bullet was trading at about 3bp through Euribor, so that is approximately an 8bp pick up to the January 2006.

Euro volatility is a little bit lower than in the US, so that is a difference that one takes into account.

We were pleased with the type of response we got. Merrill Lynch and UBS Warburg had been in the market with a similar deal for Kreditanstalt für Wiederaufbau, so they felt that they had a good handle on demand - investors looking to pick up additional yield over bullets without taking more credit risk.

We were able to announce the deal early on Tuesday morning London time and we priced the transaction that afternoon, so that is evidence of strong demand, that we were able to place Eu500m in the same day.

In this particular transaction, the funding was brought back to us in floating rate dollars so we did not retain the optionality on the callable.

We do callable issuance in dollars because it serves as a natural hedge. That is something that we would consider doing in euros in the future, but we decided to swap back. All of our euro issuance up until now has ultimately been brought back to floating dollars.

Bookrunners' comments:

Merrill - We were excited about this transaction. This is a new asset class for euros, and it is picking up meaningful momentum.

We felt Freddie Mac was a great name to be at the forefront of pioneering this new asset class.

This is Freddie Mac's first syndicated callable deal in euros. It is not part of any programme, but it supplements Freddie's dollar callable programme and its EuroReference Note issuance. Freddie is not planing to make any commitment until the callable market develops and matures.

As far as the deal itself is concerned, over 90% was for cash, with wide distribution.

The average ticket size was just over Eu20m, which shows wide distribution.

We started up the trade on Tuesday morning into Asia, marketing it at a yield to maturity of mid-swaps plus 5p, we also marketed the 2.94% coupon and the spread of just over 23bp over the Bobl 137. The 2.94% coupon gives a 50bp pick-up to six month money and a pick-up of about 8bp on a Libor basis to the three year bullet - the 2006 is at mid-swaps minus 3bp.

We priced this deal with a small long position. What we have seen in this asset class is that you do get continuing demand, and we have indeed seen that since.

The yield to maturity versus mid-swaps has slightly outperformed on the down trade.

UBSW - Callable product in euros is clearly in demand and it is a market that is in its infancy.

We wanted to offer the market something that it had not already seen and we felt that a three year non-call six months was the right thing to offer. The front end of the curve is steep and offers the best dynamic for the deal. Short lock-outs are popular in the US and we felt that it would work out.

Given the underlying volatility in the market, investors' views on the correct levels of interest rates are liable to change quickly. Their views on whether they want to sell volatility at a given level also change.

There were investors that participated in Freddie Mac, but that did not participate in the Kreditanstalt für Wiederaufbau deal - the first triple-A callable euro benchmark - that Merrill Lynch and ourselves also led.

This deal was successful because it introduced new investors to the name and it was a different structure. We went into the execution a little long, but with the market having sold off and with investors able to enter the market at a discount to the strike price we have made good sales. In general investors are happy to support the expansion of callable debt.

Compared to bullet issuance, the participants were relatively low in number but high in volume and quality.

Volatility in dollars is higher and the curve is steeper, so the optical pick up to the bullet securities and to the underlying curve is greater.

But if you are the fund manager of a euro denominated portfolio and you want to express a view on volatility without using derivatives you have to do so in euros.

There is certainly room for further development of the euro market, but it is a question of dynamics. Freddie Mac has established a euro bullet curve, so this is a natural place for it to be.

Market appraisal:

"...in the US callable market there are more buyers of optionality, so they trade cheap on an option adjusted basis. In Europe, investors want to sell the optionality and you do not have the natural borrower base that wants to buy it.

So the dynamic is very different. In the US the borrowers just want to buy the optionality, but in Europe it is more about developing your investor base, diversifying funding and, to an extent, about the Libor swap level.

The investor base for these is very broad, but it is real money - investment managers and central banks."

"...it is hard to tell, but one does not get the impression that they were sold out by any means."

  • 03 Apr 2003

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Rank Lead Manager Amount $bn No of issues Share %
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Rank Lead Manager Amount $bn No of issues Share %
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Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
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