Texas Veterans Board Sets Floating-to-Fixed Housing Deal

DALLAS - The Texas Veterans Land Board is bringing $50 million of variable-rate general obligation bonds to market Tuesday on behalf of its veterans' housing assistance program.

As it usually does, the board entered a floating-to-fixed swap agreement in conjunction with the sale to fix the interest obligations on the bonds.

Rusty Martin, deputy commissioner of funds management for the Texas General Land Office, said the debt won't be insured.

"We believe we may even benefit from what's going on in the market right now because of the flight to quality," Martin said. "This is a double-A stand-alone credit based on the state's GO rating and the liquidity agreement is also rated well, so we don't foresee anything inhibiting our access to the market."

The Veterans Land Board will use proceeds from the Series 2008A bonds to fund its Housing Assistance Fund II, which provides home-mortgage loans to eligible veterans.

The VLB typically sells about $100 million of new-money bonds each year for the housing program and this is the first issue of 2008. The program began in 1984 and has made more than 69,000 home loans and home-improvement loans to Texas veterans.

Merrill Lynch & Co.is lead manager for the negotiated sale, with Estrada Hinojosa& Co., JPMorgan, and UBS SecuritiesLLC as co-managers.

RBC Capital Marketsis financial adviser and Vinson & ElkinsLLP serves as bond counsel.

Moody's Investors Serviceassigned its Aa1/VMIG 1 rating with a stable outlook to the issue. Analysts said while the debt comes with the state's general obligation pledge, revenue from loan repayments is projected to cover debt service requirements.

Fitch Ratings assigned a AA-plus/F1-plus rating to next week's sale, citing Texas' low debt and conservative financial operations, as well as an economy that continues to expand and diversify. Analysts said some mitigating credit factors include the pressures associated with rapid growth, property tax relief, transportation needs, and other state obligations.

Standard & Poor'sassigned a AA/A-1-plus rating and affirmed the rating on the board's outstanding debt. Analyst James Breeding said the rating applies to roughly 40 series of bonds the land board has outstanding, all of which were sold using the floating-to-fixed structure.

The board has used synthetic fixed-rate debt issues since 2001, as "they provide a much lower true interest cost, which in turn lowers the mortgage rates for our veterans," Martin said.

Moody's said the Aa1 rating reflects the state's GO credit strengths that include a strong, diversifying economy, a history of balanced budgets, and low but rising debt levels.

The short-term ratings stem from a standby bond purchase agreement provided by Dexia Credit Local, analysts said.

Moody's said the VLB will pay a fixed rate of 3.189% and receive a variable rate equal to 68% of the one-month London Interbank Offered Rated under the swap agreement with Merrill Lynch Derivative Products.

The land board has exhausted a $1 billion authorization of Fund I housing bonds, and has issued about $1.3 billion of a $1.5 billion authorization of Fund II bonds. The last voter approved bond package for the program was in November 2001.

Roughly $295 million of the Fund I bonds remain outstanding, while nearly $1.08 billion of the Fund II bonds are outstanding.

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