Money market fund managers will get reacquainted with the Virginia Housing Development Authority today.
The VHDA is slated to take bids on $332 million of its so-called short- term escrow mode, or STEM, bonds. Broken into $100,000 denominations and carrying maturities that extend out only seven months, the deal seems tailor-made for a certain kind of investor.
"I would imagine that it would go into taxable (money market) funds" as bonds start trading, said VHDA finance director Conrad Sterrett.
Winning bidders on previous STEM deals from the authority have included Merrill Lynch & Co., Craigie Inc., Bankers Trust Co., and the then-Smith Barney Inc. Based on past experience, Sterrett said he expects five or six bids today, a few more than the VHDA gets when it bids long-term bonds.
Actually, these securities almost certainly will wind up being converted into long-term bonds within a few months.
STEM is a program that the VHDA's well-regarded finance staff dreamed up a few years ago to capitalize on interest rates while they are favorable, but before the agency's various single-family mortgage programs are ready for big cash infusions.
Bonds go out broken into subseries carrying short-term rates. Each bond group carries a mandatory tender date, on which the VHDA can either convert the debt to long-term rates or roll it into a new short-term rate. While bonds are outstanding, proceeds are invested in highly rated corporate notes, term repurchase agreements, and other securities.
This approach enables the VHDA to save on additional official statements, multiple tax opinions, and other issuance costs that would stack up if it repeatedly brought long-term bond deals to market as new mortgage programs started up, Sterrett explained. "That's the principal reason for this kind of structure," he said.
Holders of the short-term securities don't have any claim once bonds are tendered and remarketed as long-term debt; the VHDA re-bids the deal at that time. That seems to stamp today's deal even more distinctly as a money market play.
In today's sale, the $332 million of taxable Series F revenue bonds are divided into six subseries ranging in size from $40 million to $66 million and in maturity date from Dec. 17 of this year to next May 19. All will be priced at par.
About $292 million of the proceeds are to fund mortgage programs, and about $40 million will be used to refund prior bonds, according to a preliminary official statement.
Sterrett said cash-flow needs make him confident the VHDA will convert each chunk of debt to long-term on the tender date, rather than continue at short-term rates.
The taxability has to do with demand for tax-free allocations in Virginia, not with the deal structure or the nature of housing getting financed, said Joseph Rogers, an attorney with the VHDA's bond counsel Hawkins, Delafield & Wood. "They've got a large program and they've been getting less and less volume cap from the state," he said.
Bonds could not be remarketed as tax-exempt, long-term debt, according to Hawkins Delafield's Elizabeth O'Connell. "It would have to have been tax-exempt from the first time it was issued," she said.
Scott Weston, a taxable money market fund manager at Countrywide Investments, said he hasn't held any STEM bonds from the authority in his portfolio. But he said he expects "to take a look at the deal" as the debt becomes free to trade.
"I would think you would be able to pick up spread versus what's out there" in short-term supply, Weston said, "based on the credit quality and that it's kind of a funky structure."
Pam Bledsoe, a taxable money market fund manager at USAA Investment Management, said she hasn't looked at VHDA paper before and doesn't know if she will this time.
Established in 1972, the VHDA is Virginia's largest bond issuer, with about $7 billion of notes and bonds outstanding as of June 30, at a split of about 4 to 1 single-family versus multifamily.
Its bonds carry the highest general obligation ratings that Standard & Poor's and Moody's Investors Service give any state housing agency - AA- plus and Aa1, respectively. That derives from the fact that the authority's long-term bonds are backed by its general fund as well as mortgage revenues.
