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Freddie Mac to find buyers for its US$3bn debt

Freddie Mac is likely to find buyers for US$3 billion in debt it plans to sell after US Treasury Secretary Henry Paulson announced steps to help the beleaguered mortgage-finance company.

Freddie Mac was scheduled to sell three-month and six-month reference bills yesterday in an auction. Paulson announced a plan on Sunday night to recapitalize Freddie Mac and Fannie Mae if needed to stem a crisis of confidence in the two companies.

“This will shore up that debt offering,” said Paul Miller, an analyst who covers Freddie Mac and Fannie Mae stocks at Friedman Billings Ramsey & Co in Arlington, Virginia. “They need to make sure that that debt offering goes well.”

Freddie Mac and Fannie Mae shares dropped by almost 50 percent last week on concern they may collapse.

The companies’ debt rallied on Friday after Paulson said they had government support. Fannie Mae and Freddie Mac issue debt to raise money for their purchases of mortgage securities. The firms accounted for about 81 percent of demand in the first quarter as other buyers retreated.

Fannie Mae’s 10-year notes yielded 68 basis points more than treasuries of comparable maturity on Friday, with the gap narrowing from 88 basis points the day before. The difference widened to almost 1 percentage point in March, the most since 2000, as credit markets froze and investors sought the safest securities.

The yield difference between Freddie Mac’s 10-year debt and US 10-year notes narrowed to 75 basis points from 94 basis points on Thursday. A basis point is 0.01 percentage point.

Paulson’s statement on Sunday effectively turned an implicit guarantee into explicit backing, said Christopher Whalen, cofounder of independent research firm Institutional Risk Analytics in Torrance, California.

“Obviously re-nationalization is imminent,” Whalen said. “It’s a begrudging acceptance of the inevitable.”

Fannie Mae last week paid record yields over benchmark rates on US$3 billion in two-year notes amid concern the company didn’t have enough capital.

The 3.25 percent notes priced to yield 3.27 percent, or 74 basis points more than comparable Treasuries. That’s the biggest spread since Fannie Mae first sold two-year benchmark debt in 2000.

Freddie Mac sells three-month and six-month reference bills every Monday, its Web site said.

“Freddie’s auction would have gone okay, but now I think it will go even easier,” said Andrew Brenner, who trades the companies’ debt as cohead of structured products and emerging markets at MF Global Ltd in New York, the world’s largest broker of exchange-traded futures and options contracts.

The Treasury Department is working to make sure the sale draws bids, a report from Wrightson ICAP LLC, a research company that specializes in government finance, in Jersey City, New Jersey, said yesterday.

“We were glad to read that Treasury officials had been calling around to ensure adequate participation in the auction,” Wrightson wrote, without attributing the information.

Paulson said on Sunday that he was seeking congressional approval for a “temporary” increase of the companies’ lines of credit with the Treasury from the current US$2.25 billion each, and the right to buy equity “if needed,” the Treasury said in a statement.

Paulson is seeking unlimited authority for 18 months to buy as much stock as he deems necessary.

Global banks and finance firms have reported losses of about US$410 billion on securities tied to US subprime mortgages. Japan’s Fukoku Mutual Life Insurance Co said there’s a risk those losses will spread and said investors should put their money into government debt, recommending Germany or France.

Mizuho Asset Management Co, which oversees the equivalent of US$37.5 billion as part of Japan’s second-largest bank, said the firm holds no Fannie Mae or Freddie Mac debt and would not be bidding at yesterday’s Freddie Mac’s auction.

“We are concerned about the US housing market, so we don’t have any agency debt,” said Hiromasa Nakamura, a senior fund manager at Mizuho in Tokyo. “It will be a difficult auction.”

Also see: SEC launches rumor-mongering probe
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