Fannie, Freddie senior debt protection costs rise
NEW YORK, Aug 27 (Reuters) - The cost to insure the senior debt of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) rose on Wednesday, while costs to insure their subordinated debt fell, on reduced expectations the U.S. government will bail out the mortgage finance companies.
Intervention is viewed as a positive for senior debt holders as it would increase government support for the bonds. There is uncertainty, however, over how any government action would affect the government sponsored enterprises' (GSEs) subordinated debt and preferred shares.
The cost to insure Fannie and Freddie's senior debt with credit default swaps each rose by around 5 basis points on Wednesday to 42 basis points, or $42,000 per year for five years to insure $10 million in debt, according to Markit Intraday.
Insurance costs on the companies' subordinated debt fell by around 6.5 basis points each to 236.5 basis points, or $236,500 per year for five years to insure $10 million in debt, Markit data showed.
Merrill Lynch analyst Kenneth Bruce said it was premature to consider a recapitalization sponsored by the U.S Treasury for Freddie Mac and Fannie Mae as capital depletion would not likely occur for several quarters. For details, see [ID:nBNG194528]
Credit Suisse analyst Ira Jersey concurs.
"Fannie Mae and Freddie Mac's capital is likely to remain above the regulatory minimums at the end of 3Q -- thereby forestalling any nationalization/conservatorship," Jersey said in a report on Wednesday.
"Given that the GSEs will likely reduce their retained portfolios to free up regulatory capital, the need for an equity capital injection is also not imminent," he added. (Reporting by Karen Brettell; Editing by Andrea Ricci)
