Regulator Repackages $3.8 Billion of CMBS
The federal regulator of credit unions this week resecuritized $3.8 billion of high-grade commercial MBS that it inherited from two failed institutions - the first and only such transaction it expects to conduct.
The three-class offering, rated triple-A by S&P and Fitch, is guaranteed by the agency, the National Credit Union Administration. That means the bonds are backed by the full faith and credit of the U.S. government, Fitch said. The deal, led by Barclays, priced at spreads that were tighter than initially sought (see Initial Pricings on Page 16).
The NCUA plans to conduct 8-10 resecuritizations totaling $35 billion, but all of the other deals will be backed by residential MBS. The first such offering, a $3.9 billion issue, priced Oct. 18.
After this week's offering, the agency still has about $560 million of CMBS from other failed credit unions. A spokesman said the NCUA doesn't plan to resecuritize them. While the agency didn't specify an exit strategy, it will presumably sell the remaining paper in the secondary market.
The CMBS resecuritization (NCUA Guaranteed Notes Trust, 2010-C1) is backed by bonds from the investment portfolios of Western Corporate Federal Credit Union and U.S. Central Corporate Federal Credit Union, which were seized last year.
The collateral came from CMBS transactions issued from 2004-2007. The vast majority was originally rated triple-A, and more than half of the pool balance still carries triple-A ratings. The largest component - 81.7% - came from A-M classes, or the mid-level tranches of the original triple-A portion, according to Fitch. Another 7.8% came from super-senior classes.
The offering, which priced Wednesday, was heavily oversubscribed. A $1.8 billion tranche of 5.9-year paper and a $1.4 billion class of 6.7-year notes priced at 100 bp over swaps. That was less than the price talk of 110-115 bp for the 6.7-year notes and 105-110 bp for the 5.9-year paper. A $613.2 million class of four-year bonds went for 60 bp, down from talk of 70-75 bp. Given the heavy interest, the spreads yesterday tightened immediately in the secondary market.
In exchange for the agency's guarantee to cover full and timely payment of principal and interest, the resecuritization trust will pay a monthly fee equal to about 2.9 bp of the outstanding principal balance. But the NCUA will honor the guarantee whether it gets paid or not. The underwriters, which included co-managers Bank of America, Credit Suisse and Morgan Stanley, evidently decided it made sense to pay for ratings, even with the guarantee, because the NCUA had no track record with investors as an issuer.
The agency set up its resecuritization program to dispose of about $50 billion of private-label mortgage bonds it assumed from five failed credit unions. The overall volume of bond issuance will be lower, in part because of over-collateralization.
The seized credit unions together held $5.1 billion of CMBS, based on their midyear corporate filings. The biggest chunk, $4.1 billion, belonged to Western Corporate, of San Dimas, Calif. Its holdings consisted of $3.8 billion of fixed-rate bonds and $289 million of floaters. U.S. Central, of Lenexa, Kan., had $400 million of CMBS, all with fixed rates.
About $800 million of the CMBS assumed from Western Corporate and U.S. Central was sold to secondary-market buyers in September. The rest went into this week's offering.
The three other credit unions were seized in September. Members United Corporate Federal Credit Union of Warrenville, Ill., held $549 million of CMBS at midyear. Constitution Corporate Federal Credit Union of Wallingford, Conn., held $21 million. Both portfolios were split almost evenly between fixed- and floating-rate paper. Southwest Corporate Federal Credit Union of Plano, Texas, didn't own any CMBS.