Fannie, Freddie CDS may recover 92-94 pct

NEW YORK Mon Oct 6, 2008 1:01pm EDT

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NEW YORK (Reuters) - Sellers of protection on mortgage finance companies Fannie Mae FNM.N FNM.P and Freddie Mac FRE.N FRE.P will likely be repaid 92 to 94 percent of the insurance they sold, based on the initial results of an auction on Monday to determine the value of the contracts.

Initial indications are that swaps on the senior debt of Fannie Mae and Freddie Mac will recover 92.4 percent and 93.75 percent, respectively, and swaps on their subordinated debt will recover 92.65 percent and 93.8 percent, respectively, according to Creditex, one of the administrators of the auction.

The net open interest on all of the contracts was to buy the debt, indicating the final price may be higher than the initial results.

"For the first time in auction history, the net open interest has been to buy, rather than sell bonds," Tim Backshall, chief analyst at Credit Derivatives Research, said in a note.

The difference in the number of buyers and sellers was most pronounced in Fannie Mae and Freddie Mac's subordinated debt, indicating that more protection buyers on this debt are using the auction to settle the contracts with cash payments, Backshall said.

When a default occurs, buyers of protection with credit default swaps are paid the full sum insured, and in return protection sellers receive the defaulted debt, or cash equivalents.

Payments on the contracts were triggered last month when the U.S. government placed the mortgage finance companies in conservatorship.

(Reporting by Karen Brettell; Editing by Dan Grebler)

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