The Chicago Housing Authority's pioneering $298 million bond sale that leveraged the agency's future federal capital grants and has is a model for other public housing agencies won top honors at The Bond Buyer's Deal of the Year awards dinner last month.
The newspaper selected the CHA's transaction from among the five earlier-named regional winners. CHA chief executive officer Terry Peterson and chief financial officer Todd Gomez accepted the award on the agency's behalf at the dinner held at the Ritz Carlton Battery Park in New York City last month.
The deal - two years in the making - marked a first for the tax- exempt market when it priced in November 2001. The CHA used the federal grants it receives from the U.S. Department of Housing and Urban Development as its sole security for the capital program revenue bonds.
Lehman Brothers acted as book-runner with Salomon Smith Barney Inc. as co- senior manager. Siebert Brandford Shank & Co. served as financial adviser. The bond counsel was Chapman & Cutler, issuer's counsel Kutak Rock and co- underwriter's counsel were Ungaretti & Harris and Sanchez & Daniels. Bank of New York Midwest was the trustee. Standard & Poor's gave the bonds a AA rating, Fitch rated it AA-minus, and Moody's Investors Service gave it a Aa3. The bonds were not insured.
Though the market is accustomed to the leveraging of transportation funds in so-called Garvee transactions, no public housing agency had ever before leveraged its capital grants. The securitization-like structure was considered the CHA's best route to access the capital markets to raise money for a $1.5 billion rebuilding program given the agency's troubled financial and management history that led to a federal takeover in 1995.
To structure its offering as a securitization, the CHA engaged in two years worth of negotiations with HUD which eventually embraced a series of policy changes that paved the way for the deal. Most importantly, the agreement between HUD and CHA provided a 10-year guarantee on the authority's capital grant funding levels of roughly $139 million annually. That provided CHA officials with a base of funding to work with and they then went through a series of negotiations with rating agencies and others in the capital markets and then back to HUD in an attempt to craft an attractive financing for investors.
The authority was able to persuade HUD to agree to a provision in its Moving to Work agreement that gave the agency more flexibility as it proceeded with a transformation plan that included working with private developers on mixed-income housing. HUD also agreed to bypass the CHA and transfer grant monies needed for debt service directly to the bond trustee. HUD also provided an assurance to bondholders that it would not to touch the CHA's capital grant funds, even in the event that the agency faced administrative sanctions.
The CHA took a series of other steps in order to help make its case with HUD, the rating agencies, and investors. The finance team commissioned a report from University of North Carolina professor Michael Stegman on the importance of public housing "so the case could be made for the essentiality of public housing," said Adrienne Archia of Siebert Brandford.
The deal also proved a new experience for the rating agencies. "We had to undertake a learning process," said Jeffrey Previdi, a member of Standard & Poor's housing team. "The key factor in our rating was the way the transaction was structured so that the risk was really focused on the federal appropriation." Though the concept of leveraging the grants is somewhat like Garvee bonds, the appropriation risk of each is unique, as the federal government funds housing and transportation programs differently.
Analysts achieved a level of comfort after reviewing the 50-year history of funding for public housing finding that showed support was consistent. The rating agencies also sought a structure that would guard against funding delays. Seeking to reduce the impact of a drop in funding on the bonds, the CHA has a planned amortization schedule that maintains three times debt service coverage over the life of the bonds through the final maturity in 2019. Once HUD's 10-year funding agreement expires, the authority's grant awards will be based on its number of units and type of housing.
The CHA took a conservative approach, incorporating a grant rate that is based on what it would receive now with the number of projected units it will have in the future. The authority put the figure at $55 million and did not assume any inflation.
The schedule crafted by the finance team was aimed at maintaining strong debt coverage and providing the CHA with the maximum amount of funds early on when the agency's cash needs for construction are greatest, according to Gomez, the CFO.
Principal repayment does not begin until 2006. Then it is accelerated through 2009 while the 10-year funding agreement is still in place.
"The structure was tricky in that respect," Gomez said.
The idea of leveraging federal grants was first conceived in rough form by finance professionals shaping the CHA's $1.6 billion program to rebuild and reshape the agency's public housing stock. It followed HUD's decision to return control of the CHA back to Mayor Richard M. Daley in 1999. Two familiar names in the local public finance community serve on the Daley-appointed board: chairman Sharon Gilliam, a former city budget director, and Leticia Davis of the financial advisory firm Davis Financial.
The proceeds of the deal have helped finance renovations of the CHA's senior housing and scattered-site housing units. The scope of the ambitious and controversial transformation plan is much greater in that it calls for the demolition of crime-ridden high-rise housing projects, the renovation of low- to mid-rise buildings, and the development of new mixed-income units through partnerships with private developers.
Under the plan, the CHA will reduce its housing stock from 33,000 to 25,000 new or renovated units.
The agency will transfer property management to private firms. Though many residents of dilapidated buildings might agree that some overhaul is needed, the authority's plan has drawn angry protests from those who fear displacement.
The CHA has said that all current residents will have a home, whether in a new unit
or a private property subsidized through the Section 8 program. But critics have said it is often difficult to find property owners in nicer neighborhoods who are willing to take the vouchers.
Other members of the underwriting syndicate included Loop Capital Markets Inc., M.R. Beal & Co., Banc of America Securities, LaSalle Capital Markets Inc., Melvin Securities; and Morgan Stanley & Co. The debt was structured with bonds maturing serially from 2006 to 2019 that carried interest rates from 5% to 5.375% and term bonds maturing in 2018 that carried a 5.50% interest rate, according to the official statement.
