Top Borrower

IFR Top 250 Borrowers 2008
5 min read

Since being established in 1932 to finance banks and support mortgage underwriting, FHLB – comprising 12 regional banks – has grown to over a trillion dollars. As a borrower, in volume terms, they don't come much bigger, as Jonathan Bracey-Gibbon reports.

"Our primary mission is pretty simple," said Mike Ciota from Federal Home Loan Banks (FHLB) Office of Finance, "it is to provide liquidity to member banks and financial institutions through secured lending. There are about 8100 across the country, and we support them by raising funds in the global debt markets."

The FHLB are purely an issuer. Each of the 12 FHLB has members in their own region, ranging in size from several hundred to well over a thousand and including commercial banks, insurers, credit unions, and savings and loans organisations. These institutions draw down borrowing from the FHLB system, of which they are members. While the volumes are substantial, the process is fairly straightforward.

"One of the Home Loan Banks might require a certain amount based on member loan demand for that day or week," said Ciota. "We then aggregate that demand here at the office of finance. It may be that one FHLBank may have interest in a certain type of funding for its members, and another might have a similar interest in a different part of the country. We can quickly aggregate that here and, based on conditions, issue in a larger size."

These are interesting times for the FHLB. This year, the amount of loans made to its members banks rose to a record high, and, as the credit crunch fallout continues to limit sources of funds to mortgagers, the 12 FHLB have become increasing vital to lenders.

"We're a flexible issuer so we can tap the markets and obtain the most appropriate funding for member demand, then deliver very quickly," said Mike Ciota. "We believe in a broad group of underwriters. We have about 100, and 85 of those underwriters have been active already this year. We have raised US$270bn net in the past year (at time of writing).

"We have a number of different products that are used to access the markets. We run auction programmes where we offer discount notes to 16 underwriters in a Selling Group. The structures offered are four-week, nine-week, 13-week and 26-week. We also auction TAP issues daily – these are bullet bonds that are reopened over time and grow to significant size.

"With our mix of debt products and liberal use of swaps, we can see where investor demand is and obtain cost-effective funding while providing quality Triple A paper for investors. The FHLB generally match-fund assets and liabilities, and as such, we are a very flexible issuer.”

Most of The FHLB issuance is done via reverse inquiry where the FHLB negotiates the terms with an underwriter. Historically, negotiated issuance represents about 85% of its total issuance.

"But we tend to go where were the demand is best so we can get the appropriate funding," said Mike Ciota.

The FHLB also have a broad cross section of investors.

"Central banks are interested in larger bullet issues," said Ciota. "We have had a lot of interest from money market funds in shorter structures, like discount notes and floating rate bonds. Fund managers are also interested in whatever they think might fit best in their portfolios. About two thirds of the large global volume this year was internationally placed."

The sub-prime fallout may have affected elements of FHLB membership, but at the sharp end of debt financing, there's been little change.

"We're still doing the same things as a year ago but the volume has increased," said Ciota. "[The sub-prime fallout] made us busier. We had to raise more funds to satisfy loan demand. We've raised about US$270bn since last July 1 through the first quarter, but we still use the same means to access the markets. The FHLB are a Triple A issuer, and investors have been understandably supportive."

The FHLB' own exposure is limited. The assets on its balance sheet comprise 69% (at Q1 2008) secured lending business; 24% proprietary investments; and the remainder in its mortgage portfolio – around 7% its assets – all fixed rate out to 30 years. With an average LTV of around 68% and an average FICO of 740, they are not sub-prime.

"In 75 years we've never lost any money on our secured lending business,” said Ciota. “This is a testament to our member credit and collateral management, as well as generally conservative business practices. At the same time, we have been able to respond to member demand, particularly in the last year, and provided liquidity when it was needed. Assuming no growth this year, we could issue $500bn in term debt."