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Wednesday, August 20, 2008 2:57 AM

Fannie, Freddie $223 Billion Debt Rollover Problem

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Fannie and Freddie have a looming $223 Billion Debt Rollover Problem.

Aug. 20 (Bloomberg) -- Fannie Mae and Freddie Mac's success in repaying $223 billion of bonds due by the end of the quarter may determine whether they can avoid a federal bailout.

Fannie, based in Washington, has about $120 billion of debt maturing through Sept. 30, while McLean, Virginia-based Freddie has $103 billion, according to figures provided by the government-chartered companies and data compiled by Bloomberg.
My Comment: It is a near certainty taxpayers will be bailing out Fannie and Freddie. The only questions now are about the size and exact nature of that bailout.
The Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie and Freddie by the end of next month, according to Bill Gross, who manages the world's biggest bond fund at Pacific Investment Management Co.
My Comment: Bill Gross made a huge bet on Fannie and Freddie. So far, I do not think it is working. More on this below.
Freddie Mac "continues to have strong access to the debt markets at attractive spreads," spokeswoman Sharon McHale said. Fannie spokesman Brian Faith declined to comment.

Investors this week demanded an extra 104 basis points in yield to own Freddie's five-year debt rather than Treasuries of similar maturity, the most since reaching a 10-year high of 114 basis points in March. The gap narrowed to 74 basis points after Paulson's announcement. A basis point is 0.01 percentage point.

Fannie spreads approached a 10-year high of 104 basis points on Aug. 18, from 74 basis points on July 28. In the decade before 2008, the spread averaged 43 basis points.
My Comment: Spreads are at record highs. Why Freddie spokeswoman Sharon McHale would call record spreads "attractive" is a mystery.
After receiving authority last month to inject unlimited capital into Fannie and Freddie, a Treasury spokeswoman this week said Paulson had no plans to use his new power.
My Comment: Paulson has virtually zero credibility at this point, on the dollar, on Fannie, on anything.
Freddie's 5.57 percent perpetual preferred shares are trading at $9.37 to yield 15.3 percent, compared with $17.99 and a yield of 7.77 percent on June 30 before the crisis erupted. Fannie's 5.5 percent preferred shares yield 16.4 percent, up from 7.83 percent on June 30.
My Comment: Those preferred yields suggest that bondholders may not be made whole by whatever shape the bailout takes. Pimco just might find itself on the wrong side of its bet if bondholders participate in some of the losses. And certainly equity holders will be wiped out in any kind of bailout.

Minyan Peter was discussing various bailouts today in Fannie, Freddie and Countrywide Issues Affect Everyone.
On Freddie and Fannie I expect that the government will invest in those entities at a capital level just below the now explicitly US guaranteed senior debt – think “super-senior" subordinated debt with warrants. To do anything different would provide a windfall to existing subordinated debtholders and preferred and common shareholders, which I believe would be politically unpalatable. At the same time, though, while common dividends will be eliminated, I expect that the existing preferred stock dividends and subordinated debt interest coupons will be paid.

On Countrywide, I have always felt that the question was never “Will Bank of America (BAC) buy Countrywide?” but “At what price will BofA buy Countrywide?” Well, it has now become clear that the price to be paid is going to come not just from BofA and Countrywide shareholders, but from Countrywide debtholders as well. My best guess is that BofA will drag the uncertainty out as long as it can, continuing to release more and more troubling data about the Countrywide portfolio.

Ultimately, though, I expect that BofA will tender for the bonds – at a substantial discount to par – and book some level of gain in the process. Remember, having closed the deal that no one thought he should close, Ken Lewis needs to find some way to save face with his board of directors.

But I hope by walking through these two examples, you can see that every deal will be different, and more importantly, given the magnitude of pain to be inflicted, everyone will be impacted.
$233 Billion is a an enormous amount of debt to have roll over between now and September 30, especially in this market. And there is a decent chance the bond market chokes on those rollovers. That is one reason why Paulson asked for a blank check to buy unlimited amounts of Fannie and Freddie bonds.

If the Fed does step in to bankroll those bonds, it may want "super-senior rights". Fear of that possibility is pushing those spreads to record levels. Paulson's resolve to not use the authority he asked for is very likely to be put to the test.

Mike "Mish" Shedlock
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