CHICAGO — The Nebraska Investment Finance Authority Thursday will price $196 million of fixed-rate bonds, followed in two weeks by $478 million of variable-rate debt, in a deal aimed at helping the authority better manage its swap risk.
The borrowing — which will mark the authority's largest bond transaction to date — includes a mix of new-money and refunding single-family housing revenue bonds that are rated AAA by Standard & Poor's.
About $160 million represents new money, and the rest will refund all the authority's variable-rate debt. The refunding will keep the debt in a variable-rate mode with the same three interest-rate swaps and a new letter of credit from the Federal Home Loan Bank of Topeka.
Like all housing finance agencies, NIFA faces a potential problem with debt that is hedged with interest-rate swaps. Federal rules require HFAs to use a certain amount of mortgage prepayments from homeowners to redeem the bonds used to originate the mortgage. If that debt is hedged with an interest-rate swap, the issuer could be left paying on a swap with no outstanding debt.
Prepayments have stepped up the last few years as homeowners have refinanced to take advantage of low mortgage rates.
The upcoming transactions will refund about 20 series of bonds under one master indenture. The $196 million of fixed-rate debt will allow NIFA to tap the fixed-rate bonds when it needs to redeem debt instead of taking out variable-rate bonds that are hedged with swaps.
"Given the prepayments we've been experiencing, we need a little more money and flexibility to keep those swaps in sync, if you will, with the underlying variable-rate debt," said chief financial officer Steve Clements. "We need to keep at least as much variable-rate bond issuance outstanding as we have swap notional risk."
The deal will also allow the authority to take advantage of the federal alternative minimum tax holiday, achieve some interest-rate savings, and finance the next phase of its participation in the federal new issue bond program.
The sale comes as Nebraska's mortgage market remains sluggish but stable. NIFA is originating $1 million in mortgages a week, a "reasonable" pace that is nevertheless down from a peak of $1 million a day in 2007, Clements said.
JPMorgan is the senior book-running manager on the bond sales. Ameritas Investment Corp., Barclays Capital, and D.A. Davidson & Co. round out the underwriting team. Kutak Rock LLP is bond counsel.
Thursday the finance team will price $196.4 million of fixed-rate debt that includes a mix of serial and term bonds that mature from 2022 through 2045. The debt is not subject to the AMT.
Of that, $159.7 million is new money and $36.7 million is for refunding.
The authority will price $478.5 million of variable-rate debt starting Dec. 28. Of that, $348 million will be non-AMT debt under the federal holiday allowing issuers to refinance AMT debt into non-AMT debt by Dec. 31.
The variable-rate debt will feature a one-year letter of credit from the Federal Home Loan Bank of Topeka, NIFA's regular liquidity provider.
By using a bank that is part of the highly rated federal home loan bank system, NIFA avoided liquidity problems that afflicted other issuers, Clements said.
Depfa PLC and Dexia provided up to 30% of the HFA market with liquidity, according to Larry Witte, a housing analyst with Standard & Poor's. HFAs that relied on Depfa and Dexia for liquidity found themselves with bank-held bonds amid a series of downgrades of the providers.
"We went through the 2008 joyride and never did have a bond that actually went to a bank or that couldn't be remarketed," Clements said. "Part of that was the stability of the federal home loan bank and their perception in the market, which is as strong as you can get."
It is the first time that NIFA has refinanced a chunk of debt to manage its swap risk. Clements said it is cheaper than terminating the swaps and that the authority enjoys the relative stability of synthetically fixed interest rates over market exposure.
"The swaps are so out of the money that that's not something we want to get into — it would cost millions. And we've got very low tolerance for interest-rate risk," Clements said. "This is a belt-and-suspenders effort to make sure we won't run into a mismatch where we would have to pay the price of an unmatched swap or we'd have to terminate."
The swap counterparties are RBC, Deutsche Bank, and Barclays PLC.
Homeowners' ability to pay off their mortgage at any time introduces an element of uncertainty into all housing debt. Many HFAs use swaps to lower their overall interest-rate risk, but the swaps introduce a new uncertainty, Witte said.
"The only thing that HFAs really have to offer that traditional lenders don't is a low rate. As rates got lower, one way HFAs have lowered their debt cost is to issue variable-rate debt," Witte said. "This allows them to increase the buyers of their bonds and lowers their interest costs. But then of course there's the interest-rate risk side of it, and in many cases HFAs enter into swaps to hedge that risk."
Some issuers use swaps with call features to mitigate the problem, Witte added. "There is a risk with swaps, but I can't say one is worse than the other — whether no amortization risk or a mismatch is the bigger issuer," he said.
In the future, NIFA will likely stick to issuing fixed-rate debt, Clements said. "I never say never, and we may issue some variable-rate, but at this point I don't see it as at the top of the list."
The new-money piece of the deal will finance the authority's next batch of mortgages that will be financed by bonds sold as part of the federal new issue bond program.
The Obama administration launched the program late last year to boost housing finance agency issuance of bonds for affordable housing sheltering low- to moderate-income families. Under the program, the Treasury Department agreed to buy state and local HFA bonds through Fannie Mae and Freddie Mac. The Treasury's purchase is capped at 60% with the remaining 40% to be sold on the open market.
The NIBP required issuers to sell the bonds, usually short-term, by the end of 2009. Proceeds were placed in escrow, and each issuer is allowed to go to market up to six times through the end of 2011 to convert the securities to long-term debt.
Clements, like many HFA officials, praised the program as an effective way to lower borrowing costs and thereby offer lower interest rates to borrowers.
But Witte said the program's impact has been dampened amid historically low interest rates. "Rates have been so consistently low that the HFAs have not been able to get under it," Witte said.
Far more effective, the analyst said, was the Treasury's sister program, the temporary credit and liquidity program, that offered HFAs liquidity support from Fannie Mae and Freddie Mac. "That program was huge," Witte said. "Of the two, TCLP had a much bigger impact so far, though I don't think people thought that was going to be the case."
