CHICAGO - In a first-of-its-kind in the municipal market, the Chicago Housing Authority tomorrow will price $298 million of capital program revenue bonds backed solely by future federal housing grants in a deal that market participants said will likely serve as a model for future financings by other public housing agencies.
The pioneering deal has been two years in the making. It was first conceived in rough form by finance professionals shaping a financing plan for a $1.6 billion transformation of the city's public housing stock after the U.S. Department of Housing and Urban Development gave control of the CHA back to Mayor Richard M. Daley in the summer of 1999.
Lehman Brothers is the book-runner, and the finance team was still evaluating bids from triple-A rated bond insurers, according to CHA chief financial officer Todd Gomez.
The housing grant deal is similar in some ways to grant anticipation revenue vehicles, or Garvees, which are bonds that leverage federal highway grants. But congressional appropriations for housing and transportation work differently so the deal required the more intense level of scrutiny that is afforded a new type of security.
Through a series of guarantees signed off on by HUD, the final product crafted by the CHA largely limits investors' risk as to whether Congress will continue to approve public housing aid.
"That is the essence of the credit," said one finance official working on the deal.
The securitization-like structure was considered the CHA's best route with the capital markets given the agency's troubled financial and management history that led to a federal takeover in 1995.
The first crucial piece to the deal was HUD's decision to guarantee the authority a stream of $139 million of capital grant funding for 10 years. 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 other members of the capital markets and back to HUD in an attempt to craft an attractive financing for investors.
The result: HUD agreed to forward the amount needed semiannually to cover debt service directly to the trustee, Bank of New York Midwest. It also agreed that any administrative sanctions the CHA is subject to down the line for potential violations of HUD rules won't impact the level of aid needed to meet debt service.
Those terms helped garner the deal ratings in the double-A category. Standard & Poor's gave it a AA rating, Fitch rated it AA-minus, and Moody's Investors Service gave it a Aa3.
"Those provisions augmented the strength of the structure," said Standard & Poor's housing analyst Jeffrey Previdi. "The key factor in our rating was the way the transaction was structured so that the risk was really focused on the federal appropriation."
That risk is mitigated by a long history of congressional support for public housing, according to the various analysts who established the criteria for the new credit. "The 30-plus year continuous funding history for modernization is a significant strength and provides comfort regarding the likelihood of future funding," Moody's analysts wrote.
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 throughout the life of the bonds that carry a 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 account for inflation.
The schedule crafted by the finance team is 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, Gomez said. 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 finance team was scheduled to hold an investor call yesterday but with the rating reports out for about a week, investors appeared to already have a pretty clear understanding of the transaction.
"It looks pretty tight," said Thomas Spalding of Nuveen Investments.
Though the structure is sound, that the CHA and the security used are new to the market will still impact the deal's price a bit, Spalding said. He predicted that yields may be about five basis points higher than other similarly rated deals.
Proceeds of the deal will help cover the CHA's plans to renovate its 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 overall housing stock from 38,000 to 24,000 units. 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 they will be displaced. The CHA has said that all current residents will have a home, whether it is a new unit or a private property subsidized through the Section 8 program.
The agency first outlined a sketch of the financing in the fall of 1999. The CHA's chief financial officer at the time, David Agazzi, said the authority would likely have to offer double-barreled backing for the bonds and he was unsure as to who would serve as the issuer. The plan has come a long way, but not without several setbacks.
Soon after Daley won back control of the agency, he put a new board in place and at the helm of the agency he placed Chicago Public Schools executive Philip Jackson. Former city budget director Sharon Gist Gilliam was named board chairman. Daley also put Leticia Davis, of Davis Financial, on the board.
By the spring of 2000, Jackson, who clashed with board members, and Agazzi, frustrated with the CHA bureaucracy, were gone. Daley turned to an alderman, Terry Peterson, to take over, and the board hired Gomez, a housing banker who had last worked for the merged investment banking unit of Nuveen and U.S. Bancorp Piper Jaffray in Chicago.
CHA officials had already selected the team for the deal -- Siebert Brandford Shank & Co. as financial adviser and Lehman as book-runner. Salomon Smith Barney Inc. is the co-senior manager. But then the country elected a new president and there were new administrators to work with. Those issues put off the timing of the sale somewhat, but the CHA counters that there was not an immediate need for cash as construction plans were still in the works.
Though Chicago and HUD have clashed in the past, current CHA officials praise the federal agency for its willingness to help craft a financing that will permit public housing agencies nationwide to borrow against their grants. "It shows HUD's commitment to do things in a different way," Gomez said.
He said the authority has no further plans to leverage capital grants although it could through the issuance of subordinate debt. The agency does anticipate selling as much as $200 million of mixed-use housing bonds that would require a portion of the state's private-activity volume cap.
Market participants said they believe a handful of public housing agencies are eyeing similar transactions but are awaiting the results of the CHA deal. The Philadelphia Housing Development Corp. has been considering a $125 million transaction and Providence Housing Authority is ready to price a $5.2 million capital grant-backed deal.
