Bonds News

Fannie Mae facing short-term debt refinancing risk

NEW YORK, Nov 10 (Reuters) - Fannie Mae, the largest provider of funding for U.S. home mortgages, on Monday said market turmoil and lingering concerns about its business will raise its risks of refinancing debt this quarter.

Fannie Mae said it will continue to rely on short-term funding for its massive portfolio, and to raise cash, as some investors shun its “benchmark” note program. Fannie Mae boosted short-term borrowings to 33.7 percent of debt outstanding as of September from 29.4 percent in December, the company said in a regulatory filing.

The shift comes amid a drop in demand for Fannie Mae long-term bonds from investors outside the U.S., and as a federal program to guarantee some unsecured bank debt puts such “federal agency” debt at a sudden disadvantage.

“Due to current financial market conditions and current market concerns about our business, we currently expect this trend toward dependence on short-term debt and increased roll over risk to continue,” it said.

Fannie Mae has $140 billion in maturing short-term debt in November and December, according to Barclays Capital. Fannie Mae had $844.4 billion in total debt as of Sept. 30.

Debt issuance is the lifeblood of Fannie Mae and rival Freddie Mac, which own or guarantee nearly half of all U.S. mortgages. The importance of the companies to the housing market has increased as the credit crisis deepened, and led the government in September to force them into conservatorships to ensure they have enough capital to operate.

Risks of using more short-term debt issues include rising interest rates and the possibility the company may not draw enough demand to refinance maturing securities, Fannie Mae said in the filing. The company is “increasingly” exposed to those risks, it said.

Fannie Mae on Monday reported a record $29 billion third quarter loss as it wrote-down a tax-break and costs of the housing downturn mounted. The loss eroded the net worth of the company to levels that raised chances of a capital injection by the U.S. Treasury, as pledged in the the conservatorship.

Long-term debt issuance prospects were “dim,” Barclays analysts said, also because the company is bumping against limits defined under its conservatorship. Fannie Mae said it was $12 billion under its estimated debt limit as of Oct. 31.

“We expect little or no growth for either GSE in the near term” due to the need for equity injections, restrictions on liabilities and inaccessible long-term debt markets, analysts at Barclays said in a research note.

That raises the possibility that Fannie Mae for a second straight month will abandon its issuance of benchmark notes that had fueled the company’s growth with a reputation for predictability and liquidity. It is slated to announce a note sale on Nov. 17.

For now, the short-term debt is trading well and, in some cases, even better than Treasury securities, said Scott Graham, head of the U.S. debt syndicate at RBS Greenwich Capital Markets in Greenwich, Connecticut.

Fannie Mae and Freddie Mac are also not alone in negotiating the pitfalls of capital markets, he said.

“Liquidity right now is not just an agency phenomenon,” Graham said. “It’s year-end, there is massive deleveraging, cash is being held on the sidelines and banks being very slow to lend. That has created a lot of of illiquidity.”