Never Say Never Again – Bonds are Back!
Texas Housing Conference
July 28-30, 2014
Hilton Hotel
Austin, TX
Presenters
Mahesh Aiyer, Community Bank of Texas
Sean Cullen, RBC Capital Markets
Nicole Flores, City Real Estate Advisors
David Danenfelzer, TSAHC
Ken Overshiner, JP Morgan Chase
Cody Wilson, Merchant Capital, LLC
Never Say Never Again – Bonds are Back
Current Market Update and Financing Observations
Texas Housing Conference
Tuesday, July 29, 2014
Hilton Hotel
Austin, Texas
Cody N. Wilson
Merchant Capital, LLC
cody.wilson@merchantcapital.com
Tel: (334) 834-5100
Rates have trended lower over the past year.
■
After peaking in fall 2013, tax-exempt rates have trended lower.
Historical Performance of 30-year MMD1,2
4.80%
4.60%
4.40%
4.20%
4.00%
3.80%
3.60%
3.40%
3.20%
3.00%
After peaking in September 2013, the 30-year MMD is down 119 basis points
Source: Bloomberg.
1. Reflects market conditions as of July 18, 2014
2. Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds
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Despite the recent back-up yields, rates remain below historical levels.
■
Both taxable and tax-exempt rates remain well below historical averages.
Historical Performance of 10-Year UST versus 30-year MMD1,2
9.00%
8.00%
7.00%
HISTORICAL OBSERVATIONS
Times below
7/18/2014 7/18/2014
30-Yr MMD
3.32
3%
10-Yr UST
2.45
9%
High
6.96
8.35
Low
2.79
1.39
Ave
4.92
4.77
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
10-Year UST
30-Year MMD
Source: Bloomberg.
1. Reflects market conditions as of July 18, 2014
2. Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds
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Outlook for Interest Rates
OUTLOOK FOR INTEREST RATES
■
The Fed is winding down “QE”
— The Fed is currently “tapering” $10 billion per meeting
Market
Headwinds
■
Municipal yields have outperformed this year. Are we due for a correction?
■
New issue supply remains low, but has spiked in recent weeks
■
Risk of tax reform
■
Positive municipal market technicals
— Supply/demand mismatch
Market
Support
■
Economic data remains weak
■
Elevated redemptions
— June, July and August are heaviest months for interest payments/maturities
■
Inflation running below Fed’s mandate
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Short-term Cash Collateralized Bonds /Taxable Loan or Mortgage
■
The following sets forth the typical structure on these executions.
TAXABLE LOAN/MORTGAGE2
SHORT-TERM BOND EXECUTION
Underwriter
Bond Proceeds
Bond Proceeds
Trustee
Bond Proceeds
Bonds
Bond Investor
Lender
Negative Arbitrage
Account1
Project Fund
Loan Proceeds
Collateral Fund
Construction Draw
Interest due
on Bonds
Developer
Project Costs
The Project Fund and Collateral Fund will
always equal the par amount of the
Bonds. A draw from the Project Fund
must be accompanied by depositing the
same amount in the Collateral Fund.
After the Project is placed in service, the
Bonds will be retired with proceeds from
the Collateral Fund.
Housing Project
Source: Bloomberg.
1. At closing, the Developer will need to deposit the interest due on the Bonds through the Mandatory Tender Date or Final Maturity Date
2. You can use also use FHA-Insured Mortgage, Fannie, Freddie and USDA enhanced loans
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The short-term bonds can be structured in a variety of ways.
■
The short-term bonds (the “Bonds”) can be structured in a variety of ways, including:
— Direct placement (commercial banks)
— Public sale (mainly money market funds)
■
Based on the steep yield curve, we typically structure the Bonds with a two-year final maturity (or longer if
needed) with a one-year mandatory tender. The one-year mandatory tender allows the Bonds to be marketed as
money market eligible1.
HYPOTHETICAL ILLUSTRATION2
?
_____%
0.35%
July 1, 2014
Bond Closing
Date
July 1, 2015
Mandatory
Tender
Date
July 1, 2016
Final Bond
Maturity
Date
On or before the Mandatory Tender Date, the Remarketing Agent
will remarket the Bonds with a new interest rate and a final
maturity of July 1, 2016, subject to optional redemption. The
interest rate will not be known until the Mandatory Tender Date.
Notes:
1
Rule 2a-7 restricts the quality, maturity and diversity of investments held by money market funds. Under Rule 2a-7, a money market fund must invest in the highest
rated debt, which matures in under 13 months
2
Assumes a construction timeframe of at least 12 months. Reflects market conditions as of July 18, 2014
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Standard & Poor’s Unenhanced Bond Program
■
Underwriting assumptions include:
— 1.20x DSC constraint (HAP); 1.40x DSC constraint (non-HAP)
— Vacancy loss assumptions based on historical trends
— Occupancy capped at 95% (family)
— Occupancy capped at 97% (senior)
— Operating expense savings accepted, but must be validated
— Repair and replacement reserves based on PNA
— Emphasis placed on Sponsor and Property Manager experience
■
Financing observations include:
— No credit enhancement or mortgage insurance
— 35-year interest rate ~ 5.75%
— 35-year amortization with 10-year par call
— 75-90 days for closing
— 100% debt financing
— Non-recourse
— Bonds priced off the MMD index1
Source: Standard & Poor’s
1. Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds
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Case Study – Ralston Apartments
■
Set forth below is a summary of Ralston Apartments bond financing.
TRANSACTION SUMMARY
Property
Information
Financing
Observations
■
Senior section-8 property in Columbus, Georgia
■
269 units
■
95% occupied
■
HAP expires October 1, 2033
■
100% debt financing / no committed equity financing
■
$300 repair and replacement reserves
■
Debt service reserve fund sized at 6-months debt service (principal + interest)
■
$1,394 rehab per unit
■
92% LTV
■
1.20x DSC constraint (proforma DSC is 1.25x)
■
35-year amortization
■
35-year blended rate was 5.64%
■
The tax-exempt bonds were priced in three separate terms:
■
— Term 2025
$1,275,000
4.00%@ 97
— Term 2036
$2,580,000
5.00%@97
— Term 2049
$5,765,000
5.50%@97
The taxable bonds consisted of one term:
— Term 2017
$245,000
4.25%@99
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