-->Tuesday March 11, 1:50 pm ET
By Julie Haviv, Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)-- Fannie Mae's new venture into foreign-currency denominated short-term debt is aimed at taking advantage of cheaper funding levels abroad and to avoid saturation in the front-end of the domestic market.
Fannie Mae said Tuesday that it will issue short-term debt in foreign currencies under a new program starting April 7. This will be the first time the government-sponsored enterprise is venturing outside dollar-denominated debt.
The new FX Discount Notes program will initially focus on debt issued in euros, sterling, Swiss francs and Japanese yen. Notes issued under the program will have maturities from five- to 183 days.
"Fannie Mae's FX Discount Notes initiative is a multi-currency debt-issuance vehicle for short-term debt that will help Fannie Mae support mortgage demand and enable international investors to execute transactions during their domestic trading hours and in a currency of their choice," Fannie Mae chairman and chief executive officer Franklin Raines told reporters in London earlier Tuesday.
All borrowings will be swapped into dollars, and Fannie Mae will have no foreign-currency exposure.
"This new program is purely for cheaper funding," said Andy Brenner, head of global fixed income at Investec Ernst and Company in New York."They already have widespread name recognition, so this type of issuance makes perfect sense for them."
Fannie Mae at the moment seeks to improve its funding terms by using the interest rate swaps market. For example, the company takes 10-year agency debt paper that is at Libor plus 10 basis points, pays in the swaps market, and then issues discount notes at Libor minus 10 basis points.
Under the new programm, Fannie Mae will use both the currency and interest rate swaps market. It will issue, for example, 30-day euro- denominated debt, swap the debt back to dollar-denominated debt, pay in the swaps market, thus creating funding terms that are more attractive for them.
"They want to avoid inundating the Street with discount notes, so they are using different pockets of short-term financing to make it work," said an agency strategist who asked not to be named.
Right now, Fannie Mae has"saturated the short-term debt market," he added.
At the moment, about 35% of Fannie Mae's debt is in discount notes, he noted."Fannie Mae needs to explore funding avenues to avoid flooding the front-end," the strategist added.
Fannie Mae doesn't at the moment issue euro-denominated notes, although its mortgage counterpart, Freddie Mac, currently issues euro-denominated reference notes in three-, five-, and 10-year maturities.
Fannie Mae's name is well-known overseas and investors, particularly in Asia, have been buyers of their U.S. debt in recent months.
"While there are several issuers capable of maintaining large liquid issuance, Fannie Mae's entrance into this market should satisfy investors' appetite for securities capable of being issued in large size and customized to the maturity date and the currency of their choosing," said Linda Knight, senior vice-president and treasurer at Fannie Mae.
Julie Haviv, Dow Jones Newswires; 201-938-2071; julie.haviv@dowjones.com
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