Fannie Mae now providing flexibility via customized call structure

By Jennifer Chiou

New York, Aug. 17 - Fannie Mae announced that it offers investors callable debt securities with customized call schedules.

In an agency release, Fannie stated that it continues to attract a variety of investors who participate in the reverse-inquiry callable debt issuance process, adding that its callable debt securities not only offer the potential for enhanced yields over comparable duration-matched Treasuries and noncallable securities but also provide investors with the flexibility to tailor a callable structure to match their investment criteria and interest rate outlooks.

The release noted that the distinctive characteristic of a customized call schedule is its two-part feature, the first part of which is typically Bermudan, where the bond may be redeemed on the coupon payment dates after the initial lockout period. The second part of the call schedule is customizable with respect to call feature to the investor's preference, Fannie Mae said.

The customized call schedule may be selected with both traditional fixed-rate callables and step-up callable notes, the release said.

Typically with step-up notes, the second part of the customized call schedules have exercisable call dates that fall upon one or more step-up dates, and Fannie Mae said that it provides flexibility regarding terms and lockout periods for callables.

As an example, the agency cited a customized call schedule security for which the call options are a hybrid of a Bermudan call option and a European call option.

Fannie Mae issued a $100 million 15-year non-call six-month step-up callable note (Cusip: 3136FRB77) on July 27. The coupon step-up dates occur on July 27, 2016 and July 27, 2021.

This bond has a lockout period of six months with the first callable date on Jan. 27, 2012.

After the lockout period, the bond has Bermudan quarterly exercisable call dates for the next four years. Once the Bermudan call option has expired on July 27, 2016, the only remaining exercisable call date occurs five years later, on July 27, 2021.

If the bond is not called on the last remaining call date, the bond becomes noncallable and matures on its final maturity date, the release said.

In response to investor demand in late 2010, Fannie Mae said it issued its first callable note with a customized call schedule. Through Aug. 10, it has issued 19 callable securities with customized call schedules incorporating these characteristics, totaling a notional amount of $1.05 billion.

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