Yesterday's $675 million Federal National Mortgage Association offering helped bring to more than $3 billion the amount of step-up paper issued by federal agencies in the past six weeks, one syndicate member said.

While the step-up structure is not new, agencies only began using the structure in the past month or so according to Deke Iglehart, a senior vice president at First Tennessee Bank Memphis N.A., which co-led Fannie Mae's deal with Goldman, Sachs & Co. and Merrill Lynch & Co.

Merrill Lynch is believed to have underwritten the first agency step-up deal, issued by the Student Loan Marketing Association. A Merrill Lynch spokeswoman could not immediately confirm that.

The step-up structure offers advantages to issuers and investors, Mr. iglehart said.

"It's really kind of a win-win situation," he said. From the agency's side, "basically it is an ideal funding vehicle for their portfolio of mortgage-backeds which are experiencing pre-payments. It closely matches the pre-payment schedule of those mortgage assets."

If interest rates don't rise, Fannie Mae can call the notes after the step-up date. If rates do rise, the agency may not want to call them, he said.

From the investor's standpoint, it seems to be an answer to the problem of what to do with one's money while waiting for expected rate increases.

"In the meantime, waiting for the rates to go higher can be very expensive," Mr. Iglehart said. Rates may not rise for a long time, or if they do go higher, the increase might only be modest, he said.

Through the step-up structure, Mr. Iglehart said, the investor gets a better yield in the first phase than he would on a comparable deal and the possibility of an even higher return if the bond is not called after the step-up date.

"It's definitely interest-rate driven," he said.

Fannie Mae issued $675 million of 5.10% step-up medium-term notes due 1997. The notes were priced at par to yield 96 basis points over the bond equivalent yield of the Treasury year bill. The notes are callable after June 25, 1993, when their coupon increases to 7.25%. The offering was increased from $525 million.

Also issuing step-up notes yesterday was Federal Home Loan Banks, which issued $200 million of 6.21% notes due 1999 at par. The notes were priced to yield 60 basis points over three-year Treasuries. Noncalable for three years, the notes then step up to 6.75, then annually to 7.75%, 8.75%, and 9.75%. Merrill Lynch managed the offering.

More New Issues

Fannie Mae issued $500 million of 4.19% medium-term notes due 1993 at par. The noncallable notes were priced to yield five basis points over the Treasury year bill on a bond equivalent basis. Merrill Lynch managed the offering.

Interlake Corp. issued $220 million of senior subordinated debentures due 2002. The debentures, which have a 9.5-year average life, were priced at par to yield 12.125%.

The bonds are callable on March 1, 1997, at 104.547, in 1998 at 103.031, and in 1999 at 101.516 before moving to par in 2000. A $50 million sinking fund begins in 2001. Moody's Investors Service rates the offering B3, while Standard & Poor's Corp. rates it B-minus. Donaldson, Lufkin & Jenrette Securities Inc. sole managed the offering.

Japanese Banks' Woes

The Japanese banking industry's credit quality will stay under pressure through most of the 1990s, according to a Moody's report scheduled to be published next week.

The bank's large unrealized losses stemming from exposure to declining real estate markets, Japan's continuing trend toward financial deregulation, and what Moody's sees as a "deliberate hands-off" posture by Japanese authorities were factors, Moody's cited.

"With 'true problem loans at many weaker banks already estimated to be well above 10% of their portfolios, Moody's expects bad loans to be on their books for 'a prolonged period,'" the rating agency's release said. "Because of that drag on earnings, 'the banks' performance and capital ratios will remain under pressure for several years."

In secondary trading, the high-yield market ended unchanged, while high-grade bonds finished finished up 1/8 point.

Yesterday's Ratings

Standard & Poor's upgraded its rating on Cox Enterprises Inc.'s $630 illion of privately placed senior debt to A-minus from BBB-plus, according to an agency release. Standard & Poor's also affirmed the company's A2 commercial paper rating.

"The upgrade reflects an improving business risk profile, a favorable operating outlook, and moderating financial risk," the release says.

"Cox Enterprises has strong competitive positions in cable TV, newspapers, broadcasting, and automobile auctions which have stimulated good operating performance since the 1985 merger with Cox Communications Inc.," the release says.

Standard & Poor's affirmed Australian Airlines Ltd.'s A-1 commercial paper program rating after the Commonwealth of Australia announced plans to sell 100% of Australian Airlines to Qantas and then privatize the merged group, an agency release says.

"A sale agreement between Qantas and the government has been executed, with Qantas due to pay the government $400 million (about U.S. $300 million) by the end of September 1992," the release says.

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