NCUA’s Corporate Bonds Come To Market This Morning

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WALL STREET – The long-awaited sale of $3.8 billion of NCUA’s Guaranteed Notes, created from the detritus of U.S. Central FCU, will commence this morning, when the bonds are priced and sold.

The bonds, which are known in Wall Street parlance as a resecuritization of securitized assets, will be sold in two tranches, or groupings. A tranche of $3.28 billion of floating-rate bonds will carry an interest rate of 45 to 50 basis points over the one-month LIBOR rate, according to guidance released Friday afternoon. A tranche of $566.5 million of fixed-rate bonds will carry a rate of 105 to 110 bps over what is known as the interpolated swaps rate.

The actual rate, or coupon, will not be known until the bonds are priced this morning.

In constructing the bonds from the scraps of failed U.S. Central, NCUA collected fixed-rate securities owned by the one-time $52 billion corporate and pooled the cash flows into new securities – also known as collateralized debt obligations – that will have a fixed rate, according to people familiar with the deal. Then the same was done by pooling the cash flows on floating-rate securities in U.S. Central’s portfolio and creating floating-rate bonds. Though the new bonds, all carrying 10-year maturities, were created from cash flows on troubled bonds, they were enhanced by the ultimate guarantee, that of the federal government, which attracted an AAA rating for them. The government backing makes the bonds permissible investments for federally insured credit unions.

NCUA modeled the bonds after similar securities created by the FDIC based on the cash flows from securities owned by failed banks the regulator has taken over.

If the offering is successful, NCUA hopes to sell as much as $35 billion of the bonds by liquidating the assets of the four other corporate credit union failures: WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU. Even with the sale of the bonds NCUA only is expected to recover pennies on the dollar for the failed investments of the corporates, leaving natural person credit unions with a bill of as much as $16 billion.

The initial offering is being underwritten by Barclays Capital and co-managed by JP Morgan Chase and Wells Fargo Securities. The selling syndicate also includes ISI, a brokerage owned by U.S. Central, as well as CastleOak, Loop and Williams.

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