Aside from the odd foray into the yen market, Fannie Mae has always been a devout US dollar issuer. But, since the start of 1997, something has changed. Of the 11 international bonds the US agency has issued this year, only three have been in its home currency. Does this signal a definite shift in Fannie Mae’s borrowing strategy?
The first non-dollar deal this year was a successful £1 billion (US$1.67 billion) global in February, which heralded the resurgence of sterling as an international debt market.
But it is the issues of the past two months that have caused some to wonder whether Fannie Mae is beginning to promote itself as a surrogate supranational, issuing in new or illiquid currencies to boost the currency in the debt markets.
In the first week of June the agency brought a NZ$500 million (US$345 million) global. There have been over 30 issues in New Zealand dollars so far this year, but Fannie Mae’s is only the second global. The first was a NZ$250 million issue from the World Bank way back in 1990. Few New Zealand dollar issues are for more than NZ$100 million. The lack of paper in the market helped Fannie Mae. “There are very few issuers in New Zealand dollars, but institutional investors do have an allocation for it,” says Mehmood Nathani, the agency’s director of long-term funding. “And seeing which currencies are ready for a global issue is one of our strengths.”
Whether it was Fannie Mae’s foresight or just luck, the deal was launched at exactly the right time. It was in preparation for three weeks, but little news leaked out, allowing swap rates to remain favourable. Investors were eager to get hold of the paper. “There was pressure on us to reopen the deal,” says Nathani. “But we weren’t sure how much extra demand there was, or whether the swap would still be there. So we decided to stick with what we had, and enjoy it.”
This could be proof of how seriously Fannie Mae is taking its new role. For a borrower which last year issued over US$80 billion in long-term debt, paying a few more basis points on a deal for US$300 million, or on the swap, would hardly hurt its overall cost of funds. It also suggests that Fannie Mae is using non-US currencies as part of its strategy, rather than simply on cost. “We want to be continuous issuers in these currencies, so we don’t want to disappoint investors by paying more than the odds to get into a market and coming much tighter next time round,” says Nathani.
He admits the timing of the launch was opportunistic: swap rates worked in its favour. With the New Zealand bond market not following Australia’s 50 basis point rally, it was a good time to launch. When other issuers’ paper started to widen, Fannie Mae’s tightened from 21bp over at launch to 17bp over.
The launch of a A$1 billion global at the end of June was further evidence of Fannie Mae’s desire to diversify. The rarity value attracted investors keen to add non-Australian names to their portfolios. The success of the kiwi issue was the reason for the Aussie dollar bond. “We thought that what was attractive about the kiwi issue was its pick-up over Australian bonds,” says Nathani. “But then we were told that there was even more demand for Australian- denominated paper. Investors have a larger allocation than for kiwi paper, the A$1 billion adds liquidity and tradability and, at 10-12 blips over government paper, it was a reasonable pick-up from a new name.”
The biggest challenge was the next global, Fannie Mae’s 39th. It chose to issue in Hong Kong dollars just over a week after the handover to China. Not only is the Hong Kong debt market very small – there were only six other fixed-rate issues this year – but Fannie Mae, as a US government agency, can issue only registered paper. Hong Kong debt has always been in bearer form.
At HK$1.5 billion (just under US$200 million), the deal was the largest fixed-rate bond in the currency, HK$500 million more than the World Bank’s issue in April, and three times the average size of Hong Kong government-paper auctions. And the market is now open to registered bonds – with the backing of the Hong Kong Monetary Authority (HKMA). “It wasn’t a problem for the investors,” says Mark Bucknall, head of debt capital markets at HSBC Markets in Hong Kong, the joint lead with Merrill Lynch. “They’ve been buying US dollar registered paper from Fannie Mae for years. It was getting the HKMA to accept registered paper in Hong Kong dollars. And they were more than supportive because they realize the need to develop the local debt market.”
The deal took nearly six months to launch, although it could have been launched a little earlier. “We were ready by the beginning of June,” says Bucknall. “But payment dates are usually two or three weeks here, and it made no sense to launch before the handover and pay afterwards.”
Rival bankers question whether the deal went as well as the issuer and lead managers say. “The coupon was too low at 6.85%,” says one. “And, with Fannie Mae not being tax-exempt, the spread was not as attractive. I’d be surprised if it sold as well as they claim.” Nathani rejects the tax issue: “We were offering liquidity and a new name, and we did offer around 10bp as compensation for the tax. It was equivalent to 62bp over treasuries.” Bucknall digs out an e-mail he sent two days after launch to prove that the paper was successfully placed: “I sent this to my colleagues two days after launch, and before the negative comments were reported in the press. We were flat at reoffer on our paper by then – normally a deal this size takes three or four weeks. And it was a good distribution: 37% went to the US, 7% to Europe, 7% to mainland China, 2% to Singapore and the rest to Hong Kong-SAR investors.”
Fannie Mae says it is pleased with the take-up of its paper in its recent forays into new currencies. But some observers are waiting to test the agency’s commitment to these new markets before making a judgement on whether Fannie Mae qualifies as a surrogate supranational. “Our main aim is to come up with deals that investors like, but I’d also say that we are one of the market leaders in global issuance,” says Nathani. Antony Currie
