FINANCE/NEW ISSUES ; First Zero Coupon Bond Backed by Mortgages

The Franklin Savings Association, a privately held savings and loan based in Ottawa, Kan., plans to sell the first issue of zero coupon mortgage-backed bonds, through underwriters led by Salomon Brothers Inc.

The association, which had assets of $947.5 million at the end of 1983, expects that the $3 billion offering next week will result in a lower borrowing cost than other kinds of long-term financings. One aim of the financing, analysts said, is to arrange a long- term borrowing that matches closely the long-term assets of the company.

Because the zero coupon bonds are divided into maturities of 2014, 2019 and 2024, market participants noted that the bonds could sell with low yields relative to Treasury-backed zero coupon bonds, which are not available with maturities longer than 2009.

For example, zero coupon bonds of the Federal National Mortgage Association, maturing in 2019, which trade with a slightly lower yield than is expected on the comparable Franklin issue, were quoted yesterday with a yield of about 10 3/8 percent, whereas 20-year zero coupon Treasury issues were about 11.40 percent.

Since non-interest-bearing zero coupon securities are sold at deep discounts from their face value, it is estimated that the $3 billion sale will raise only about $60 million.

To reassure potential buyers who might be concerned about the risk of investing in a savings and loan association, and who want protection against an early retirement of their zero coupon bonds, the financing includes provisions for defeasance of the issue.

For example, if collateral for the zero coupon bonds falls too low, or if Franklin fails the net-worth test of regulators, the trustee for holders of the zero coupon bonds would sell the collateral and buy other zero coupon bonds with maturities matching those issued by Franklin. Other issuers of long-term zero coupon bonds include the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Student Loan Marketing Association.

The bonds are an obligation of Franklin Savings, but are expected to be rated Aaa by Moody's and AAA by Standard & Poor's because they are collateralized with mortgage pass- through securities of the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.