Freddie Mac Likely to Find Buyers After Paulson Plan

By Dawn Kopecki

July 14 (Bloomberg) -- Freddie Mac is likely to find buyers for $3 billion of debt it plans to sell after U.S. Treasury Secretary Henry Paulson announced steps to help the beleaguered mortgage-finance company.

Freddie Mac is scheduled to sell three-month and six-month reference bills today in an auction. Paulson announced a plan last 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 July 11 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 July 11, 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.

`Explicit Backing'

The yield difference between Freddie Mac's 10-year debt and U.S. 10-year notes narrowed to 75 basis points from 94 basis points on July 10. A basis point is 0.01 percentage point.

Paulson's statement yesterday effectively turned an implicit guarantee into explicit backing, said Christopher Whalen, co- founder 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 $3 billion of two-year notes amid concern the company didn't have enough capital. The 3.25 percent notes priced to yield 3.27 percent, or 0.74 percentage point more than comparable Treasuries. That's the biggest spread since Fannie Mae first sold two-year benchmark debt in 2000.

Auction Sentiment

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

``I think 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 co-head 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, according to a report today from Wrightson ICAP LLC, a research company that specializes in government finance, in Jersey City, New Jersey.

``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 yesterday he is seeking Congressional approval for a ``temporary'' increase of the companies' lines of credit with the Treasury from the current $2.25 billion each, and the right to buy equity ``if needed,'' according to a statement released by the Treasury in Washington. Paulson is seeking unlimited authority for 18 months to buy as much stock as he deems necessary.

Japan Funds

Global banks and finance firms have reported losses of about $410 billion on securities tied to U.S. subprime mortgages. Japan's Fukoku Mutual Life Insurance Co. said there's a risk those losses will spread and recommended investors put their money into government debt, pinpointing Germany or France. Mizuho Asset Management Co. said the firm holds no Fannie Mae and Freddie Mac debt.

Mizuho Asset, which oversees the equivalent of $37.5 billion as part of Japan's second-largest bank, has no plans to bid at Freddie Mac's auction today.

``We are concerned about the U.S. housing market, so we don't have any agency debt,'' said Hiromasa Nakamura, a senior fund manager at Mizuho. ``It will be a difficult auction.''

The Federal Reserve Board of Governors also authorized the New York Fed to lend directly to Fannie Mae and Freddie Mac through the discount window to meet their liquidity needs if necessary, the central bank said yesterday in a press release.

Korea Pension Fund

The discount window offers direct loans to commercial banks at an interest rate that's now 2.25 percent, a quarter point above the Fed's benchmark rate. Bernanke opened it to investment banks at the time of the collapse of Bear Stearns Cos. in March to alleviate the credit crisis.

``We directly bought the agency bonds in the latter half of last year when credit spreads widened,'' said Kwag Dae Hwan, head of global investments at South Korea's $220 billion National Pension Service in Seoul. ``An increasing number of funds investing in that market are sprouting up as spreads have widened abnormally.'' Kwag is considering adding to his agency holdings.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.