December 31, 2019

Freddie Mac Deal Previews Transition From LIBOR

In a move that previews the transition from the London Inter-bank Offered Rate (LIBOR), Freddie Mac recently priced its first Structured Pass-Through Certificates offering that contains a class of bonds indexed to the Secured Overnight Financing Rate (SOFR).

$765 Million Issuance Backed by Multifamily Loans

On December 12, 2019, Freddie Mac announced that it had priced a new K-Deal, K-F73, which includes two classes of offered certificates in the aggregate amount of $765 million, including a $200 million Class AS certificate, which pays a coupon that is indexed to SOFR.

Freddie Mac’s K-program is a securitization program for multi-family loans. Freddie Mac creates K-Deals by selling multi-family loans to third-party investors, who then deposit the loans into third-party trusts. The third-party trusts issue private label certificates backed by loans in the trusts. Freddie Mac purchases the senior bonds issued by these trusts, and securitizes those senior bonds, which are guaranteed by Freddie Mac, and sold to investors via K-Certificates.

Deal Is Part of a Planned Transition to SOFR

The United Kingdom’s Financial Conduct Authority will no longer require participating banks to report the basic rate of interest used in lending between banks on the London interbank market after 2021. If participating banks stop reporting that rate, then LIBOR will no longer be reported. Historically, LIBOR has been the index many financial market participants use to calculate floating interest rates.

In 2014, the Federal Reserve Board and the New York Fed convened the Alternative Reference Rate Committee (ARRC), a group of private-market participants, to ensure a successful transition from LIBOR to a new interest rate index. In 2017, the ARRC selected SOFR as the preferred alternative index to LIBOR. SOFR is designed to measure the cost of overnight borrowing collateralized by U.S. Treasury securities in the repurchase market and is published by the New York Fed every business day at 8a.m. Eastern Time.

K-F73 is Freddie Mac’s first multi-family securitization that contains bonds indexed to SOFR, and Freddie Mac has stated that it is using K-F73 to support the current SOFR bond market and to ease the eventual transition away from LIBOR.

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