Federal Farm Credit Banks Funding Corporation Update

Transcription

1 Federal Farm Credit Banks Funding Corporation Update Glenn A. Doran 2012 Farm Credit System National Directors Conference September 18, 2012 Glenn Doran Managing Director Federal Farm Credit Banks Funding Corporation 1

2 STRUCTURE/OWNERSHIP 3 4 2

3 SYSTEMWIDE DEBT SECURITIES OUTSTANDING Consistent use of established debt programs ($ billions) $176.3 $ Outstanding (Par value) $ $ $ Other* $ $ Floating-Rate Bonds Fixed-Rate Non- Callable Bonds Fixed-Rate Callable Bonds Designated Bonds Discount Notes 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 8/31/12 *Includes Linked Deposits and Retail Bonds 5 FARM CREDIT SPREAD OVER U.S. TREASURIES bps 24 bps 8 bps 5/1/ /4/2008 5/12/2009 3/2/ /2/2011 4/6/2012 7/16/2012 8/7/ year 5-year 2-year 6 3

4 U.S. Treasury Curves (July 1, 2007 and September 17, 2012) 7 G.S.E. DEBT OUTSTANDING PRESENT Housing GSE debt volumes have trended downwards while FFCB debt outstanding has generally remained stable $bn FNMA FHLMC FHLB FFCB FNMA FHLMC FHLB FFCB FNMA FHLMC FHLB FFCB FNMA FHLMC FHLB FFCB FNMA FHLMC FHLB FFCB FNMA FHLMC FHLB FFCB Short-Term Long-Term Source: Barclays Capital, as of August 7,

5 August 17, 2012: Treasury Amends Terms of Fannie & Freddie Bailout - Again Changing role of the housing GSEs and increasing the pace of mortgage portfolio reductions On Friday, August 17, Treasury announced it will revamp the terms of its 2007 financial backing of Fannie Mae and Freddie Mac Under the new arrangement between Treasury and FHFA, Fannie and Freddie s quarterly profits will be turned over to the government as a dividend payment; no payment will be required when the Enterprises are not profitable The revised terms also accelerate the reduction in Fannie and Freddie s mortgage portfolios Revised portfolio terms will push forward the timeline to reach the final cap of $250 billion, now in 2018 (four years earlier than previously scheduled) Summary of Treasury Actions Remove the 10% dividend that Fannie and Freddie pay to Treasury, replacing it with a sweep of all positive profits that the Enterprises earn Increase the pace of reductions in the retained portfolio to 15% per year from 10% per year Implications for Housing GSEs & Markets Further decreases the probability that Fannie and Freddie will emerge from conservatorship in anything resembling the prior form. This move may be an indication that Fannie and Freddie will not be allowed to retain profits to build a capital base. Removes any lingering questions about the financial ability of Fannie and Freddie to honor their guarantees. Without having to pay a 10% dividend to Treasury, the $275 billion remaining funding commitment from Treasury is large, even if there are substantial further stresses in the housing market. The increase in pace of retained portfolio reduction may have a larger impact on Fannie than on Freddie. Freddie is already well below the cap and is unlikely to have to alter behavior to meet the new requirements. Freddie s portfolio is currently $581 billion (cap for 2012 of $656 billion). Fannie s portfolio is currently $672 billion (cap for 2012 of $656 billion). 5 GSE Debt Issuance Dearth of Supply Will Continue Amounts in Millions HISTORICAL US AGENCIES DEBT ISSUANCE 2012 YTD 2012 Annualized 2011 FNMA 1 FHLMC 2 FHLB 3 FFCB 4 FNMA FHLMC FHLB FFCB FNMA FHLMC FHLB FFCB Discount Notes 98, , , , , ,132 1,073, , , ,300 1,046, ,234 Other Short Term Debt 720 Total Short Term Debt 98, , , , , ,132 1,073, , , ,300 1,046, ,234 Syndicated Notes 24,000 39,500 6,000 1,000 48,431 62,456 10,337 1,581 43,000 47,500 12,000 2,575 Callable Fixed Rate MTNs 94,179 55, ,332 43, ,049 88, ,860 69, , , ,437 58,269 Noncallable Fixed Rate MTNs ,815 97,240 11,084 17, ,533 17,526 2,541 14, ,133 15,322 Callable Floating Rate MTNs Noncallable Floating Rate MTNs 6,600 25,150 21,815 13,319 43,330 34,493 24,616 62,100 30,358 31,225 Other Long Term Debt 74 4,849 26, ,666 46, ,867 54, Total Long Term Debt 125, , ,470 77, , , , , , , , ,803 Total Debt 223, , , , , ,584 1,513, , , ,360 1,455, ,037 The Agency debt market has suffered from a dearth of supply across the curve in the last 3 years as all GSEs have reduced issuance in programmatic form due to mandated balance sheet reduction or lack of business growth, and this trend is expected to continue. Total debt issuance for the remainder of 2012 is estimated to be approximately $12 to $17 billion per month for Fannie Mae and about $10 to $15 billion per month for Freddie Mac, below their 2012 annualized issuance rates. Based upon how each GSE has shrunk its outstanding debt composition, we believe that Freddie Mac will continue to shrink its debt equally across Discos, Bullets, and Callables while Fannie Mae will allow its Bullets and Callables to run-off at a faster pace. 1 as of 6/30/12 2 as of 8/19/12 3 as of 7/31/12 4 as of 8/19/12 iv 5

6 FARM CREDIT SPREAD OVER U.S.T.s (Post New PSPA) bps 18 bps 6 bps 5/1/ /4/2008 5/12/2009 3/2/ /2/2011 4/6/2012 7/16/2012 8/7/ year 5-year 2-year 11 Debt Activity Thoughts GSE Supply (Technicals) will remain very positive Short-Term, Discount Note program will continue to sell Low Rates, tempting, but cannot over-use Liquidity Calling bonds just to re-issue again will it stop? Dearth of GSE FRN issuance = Farm Credit windfall Unscheduled vs. Designated Bonds: New Reality or Short Term Effect Is the GSE Trading Business long-term viable? GSEs can change 12 6

7 Size of the Selling Group 13 Dodd Frank: The Volcker Rule Primary Dealer Inventories: Lowest Since 2001 Dealers hold $42 billion corporate bonds on balance sheet The only true source of liquidity for investors is in the primary market Dealers continue to delever Balance sheets remain under pressure To address this, BlackRock is developing an electronic trading platform for their customers and for external counterparties Primary Dealer Inventories: Corporate Bonds 2001 Present Inventory ($M) 250, , ,000 Oct-07: $233 Bn CAGR: $233 Bn 100,000 50,000 Aug-12: $42 Bn Jul-01: $24 Bn 0 Jul-01 Nov-02 Mar-04 Jul-05 Nov-06 Mar-08 Jul-09 Nov-10 Mar-12 Corporate Bond Invetory Current Inventory Source Federal Reserve Bank of New York 10 7

8 GSE Selling Group Comparison MTN Dealers Farm Credit Federal Home Loan System Freddie Mac Fannie Mae Core DN Dealers Other GSE s maintain larger selling groups. Fannie and Freddie issue MTN s on reverse inquiry. Discount Note issuance primarily through auctions. 15 Farm Credit Debt Issuance 2012 YTD 6,000 5,000 4,000 3,000 Floater Callable Bullets 2,000 1,

9 FOMC Meeting: September 13, 2012 Quantitative Easing III - QE3 (Not related to English Cruise Ships) Low levels for the Federal Funds rate are likely to be warranted at least through mid-2015 Highly accommodative stance will remain appropriate for a considerable length of time AFTER the economic recovery strengthens Operation Twist (not the Chubby Checker dance) remains in place Initiates buying $40 bn of Agency MBS per month Not Finite A Bold Shift In Fed Policy explicitly aimed at the Labor market! 17 U.S. Treasury Curves (09/10/2012 vs. 09/17/12, 2007) 18 9

10 Smooth Sailing So Far!!! 19 Things To Ponder While Boating (Not Controllable) Inability to evoke Fiscal Policy discipline The Election More of the same Europe vs. The Cleanest Dirty Shirt The Fiscal Cliff vs. Rating Agency Action GSE Reform 20 10

11 Things To Ponder While Boating (Possible to Manage) Callable Debt refinance opportunity may be over Interest Rates staying low Returns on lent Capital staying low Are These the Best of Times? The demand for better, faster information is increasing (i.e. drought) Will the biggest challenge for Farm Credit be externally or internally driven? 21 CONTACT INFORMATION Web Page Finance Desk Glenn Doran Managing Director

12 DISCLAIMER This overview is provided for general information purposes only. It is not an offer to sell or a solicitation of an offer to buy any Systemwide Debt Securities. Debt Securities are offered only in jurisdictions where permissible by offering documents available through our Selling Group. Systemwide Debt Securities may not be eligible for sale in certain jurisdictions or to certain persons and may not be suitable for all types of investors. All statements made in this overview are qualified in their entirety by the information in the most recent Federal Farm Credit Banks Consolidated Systemwide Bonds and Discount Notes Offering Circular, including the financial and other Systemwide information incorporated therein, and other offering documents. Copies of offering documents can be obtained, if permitted by applicable law, by calling the Funding Corporation at (201) , through selling group members, and through the Funding Corporation s website at Any forward-looking statements in this presentation are based on current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from expectations due to a number of risks and uncertainties. More information about these risks and uncertainties is contained in the System s most recent Annual and Quarterly Information Statements. The System undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise