2nd UPDATE: Freddie $1 Billion Commercial Mtge Bonds To Be Sold In June
May 26 2009 - 11:47AM
Dow Jones News
Freddie Mac (FRE) launched a $1 billion commercial mortgage bond
backed by multifamily loans that is due to be sold in the second
week of June.
This marks the first time that a commercial mortgage bond is
sold with the backing of a government-sponsored enterprise. It
would also be the first large commercial mortgage bond deal sold in
nearly a year.
The deal is led by Deutsche Bank Securities Inc. and is expected
to settle mid to late June.
It is backed by 62 recently originated multifamily mortgages,
and is guaranteed by Freddie Mac.
The K certificates, as these securities are called, are expected
to open up a new way for Freddie to raise liquidity and support the
troubled multifamily market. Apartment and condominium complexes
have been the most troubled in the real-estate sector.
"Freddie Mac is responding to difficult conditions in the
multifamily housing financing market by finding innovative ways to
link affordable rental housing to the capital markets," said Mike
May, Freddie Mac's senior vice president of multifamily
business.
By offering multifamily loan securitization through this bond,
Freddie is providing "critically needed support to the multifamily
housing market during these difficult economic times," May
said.
The deal is not eligible for the Federal Reserve's liquidity
program called Term Asset-Backed Liquidity Facility which was
expanded, recently, to include commercial mortgage bonds. Since the
TALF program is intended to support and encourage non-government
bond issuance, these securities don't make the cut as they come
with a Freddie guarantee, that carries implicit government
backing.
Freddie, however, expects to market the deal to investors who
are familiar with its debt and mortgage bonds, in addition to the
traditional buyer of commercial mortgage bonds.
The mortgage finance company says it hasn't set a price on the
deal yet, but is looking at a range of reference points including
risk premiums on its current debt issuance, its residential
mortgage securities and the current trading levels of commercial
mortgage bonds backed by multifamily collateral.
Freddie will sell six classes publicly, and each of them carry a
triple-A rating from Fitch Ratings and DBRS. Freddie said it took
the unusual step of rating its bonds to boost investor confidence.
However, the rating agencies won't monitor the transaction after
issuance, since they carry a guarantee from Freddie.
While loans to apartment and condominium complexes have
performed poorly, Freddie says it's cherry-picking of quality
collateral has helped preserve its delinquency rate on these loans
at 0.09%, a far cry from the industry average above 5%.
"We never went for those loans with aggressive underwriting
practices," said David Brickman, vice president of multifamily and
CMBS Capital Markets for Freddie.
"Our book is pretty solid," he said.
So far, both Freddie and Fannie Mae (FNM) have held multifamily
loans they purchase on their books without securitizing them. This
move is expected to free up Freddie's capital, so it can invest
more in multifamily loans.
On the current deal, depending on market response, Freddie may
invest in one of the classes, Brickman said.
"We are not committed to buying, but intend to support the
program if needed," he said.
Freddie's Brickman added he expects the company to do more such
deals. Its Capital Market Execution program has a pipeline of $1
billion loans that could be pooled into another deal.
"The pipeline makes it likely that we're going to see more such
deals regularly, going forward," he said.
-By Anusha Shrivastava and Prabha Natarajan, Dow Jones
Newswires; 201-938-2371; anusha.shrivastava@dowjones.com