The Connecticut Housing Finance Authority plans to begin selling $275 million of bonds today in a deal that will help effectively establish a revolving fund.

The authority plans to market several subseries of tax-exempt and taxable fixed-rate refunding bonds to institutional investors tomorrow following a one-day retail order period.

On Feb. 24, as part of the deal, the CHFA plans to market variable-rate bonds including a $100 million subseries that will be used primarily to originate single-family home mortgages. This is part of the issuer's strategy to use the proceeds of bonds that were sold last year under the Treasury Department's new issue bond purchase program, or NIBP.

Bank of America Merrill Lynch is book-running co-senior manager. Hawkins Delafield & Wood LLP, Edwards Angell Palmer & Dodge LLP, and Lewis & Munday PC are co-bond counsel.

As 2009 came to a close, housing finance agencies across the country rushed to sell $15.3 billion of NIBP bonds to meet an end-of-the-year deadline for the program.

The CHFA sold $191 million of single-family NIBP bonds and $27 million of multifamily NIBP bonds as taxable debt to Freddie Mac and Fannie Mae, which in turn sold the bonds to the Treasury. The bond proceeds were then escrowed..

As an issuer originates mortgages, it can refund the escrow bonds in up to three transactions as long-term debt by the end of 2010. The Treasury has committed buying the CHFA's fixed-rate refunding bonds at 4.05%.

The authority also expects to sell $76.7 million of NIBP bonds to the public to comply with a requirement that the Treasury's bond purchases are 60% of aggregate issuance under the program.

The escrow bonds are "keeping the seat warm for the permanent funding, and so then we have choices about how we acquire our mortgages," said Robert Lamb, president of Lamont Financial Services Corp., the CHFA's financial adviser. "One of the cheaper ways to do that is weekly floating-rate debt."

The Securities Industry and Financial Markets Association municipal swap index, a commonly used benchmark for variable-rate debt, is near historic lows, hitting 0.2% last Wednesday. The authority will market Subseries 2010A-6 as the taxable, variable-rate piece of the deal to originate mortgages.

"This floating-rate facility is to warehouse them on a taxable line of credit and get the package together, so when we take them out with long-term bonds, they're all in place," said CHFA executive vice president of finance John Craford.

The agency will originate mortgages on its long-standing resolution and then transfer them to a new indenture created for the NIBP program.

When it sells long-term, fixed-rate bonds to refund the escrow bonds, those funds will return cash to the CHFA's indenture that can then be used to originate or buy more mortgages.

"It's going to be used like a revolving fund to buy mortgages intended to be financed by these federal bonds," Craford said.

The A-6 bonds will initially bear interest in a daily mode and are being marketed as term bonds maturing in 2039.

"This is a little bit of an innovation," Lamb said. "You see people do [commercial paper] and then they refund their CP with long-term debt, and go out and do CP again. This is not that much different."

Moody's Investors Service analyst Florence Zeman said the Connecticut agency's use of taxable debt to warehouse loans under NIBP was the first example of the structure she has seen.

"This is new but we're hearing about a lot of new stuff now that [HFAs] have got this new-issue bond program and they're trying to figure out how to make the loans," she said.

Moody's rates the authority's $3.19 billion of outstanding bonds Aaa with a stable outlook. Standard & Poor's rates it AAA with a stable outlook.

The CHFA has sold $5.48 billion of bonds since 2000, according to Thomson Reuters.

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