The Department of Housing and Urban Development is currently drafting regulations that would allow public housing authorities to sell bonds backed by future public housing operating grants, a senior HUD official said yesterday.
HUDs Michael Liu made the comment yesterday at a document-signing ceremony here as the department formally approved the District of Columbia Housing Authoritys application to sell nearly $78 million in tax-exempt bonds for building rehabilitations backed by future public housing capital grants. The negotiated deal is expected to go to market two weeks from today.
Currently, public housing authorities are allowed to sell debt backed by future HUD public housing capital grants, but under regulations now being developed, PHAs would gain the power to sell bonds backed by public housing operating grants as well, Liu said.
The Quality Housing and Work Responsibility Act of 1998 contains language authorizing both capital grant and operating grant securitizations but only very recently did HUD legal counsel issue an opinion saying the department could actually move forward with bond deals involving operating grants, Liu said.
Liu also speculated that HUD might in the future allow PHAs to mortgage their properties in the future and to use operating reserves to back bonds or loans. There is a growing awareness on the part of Wall Street that public housing can and would be a good investment, Liu said.
Separately, a bond counsel said yesterday that operating grant bond deals would probably be more difficult to bring to market than capital grant bond deals have been. The markets gotten quite comfortable with pledging capital funds to support long term financings and has not, to date, felt the need to use operating subsidies for this purpose, said Anthony Freedman, a housing lawyer with bond law firm Hawkins Delafield & Wood here.
That is technically more difficult and poses questions as to debt coverage, said Freedman, a former senior HUD official. Nonetheless, there may be transactions in which it is desirable, he said.
Wendy Dolber, a managing director at Standard & Poors, said the upcoming regulations to which Liu referred would open up more opportunities for PHAs to go to the bond markets, but new criteria for evaluating the creditworthiness of the operating grant transactions would have to be developed.
Relying on operating grants introduces operating risk into the transactions, she said. If theyre going to use operating funds, there are a lot more variables, Dolber said.
The Bush administration has proposed reducing capital fund appropriations in fiscal 2006. The president proposed spending $2.3 billion on the public housing capital fund in 2006, down from $2.6 billion in the current fiscal year that ends Sept. 30.
However, at the same time the president has proposed increasing spending on the public housing operating account. In the fiscal 2006 budget proposal, the administration proposed $3.4 billion in spending for the public housing operating fund, up from $2.5 billion in the current year.
Rating agency analysts have said they expect that sales of debt from public housing capital grant deals will continue on an upward trajectory. Reductions in federal appropriations could have a detrimental effect on bond ratings eventually, they have said, but for now the deals remain creditworthy.
Meanwhile, District of Columbia Housing Authority officials yesterday provided details about their upcoming tax-exempt bond offering of up to $77.8 million in debt backed by future HUD public housing capital grants.
Lehman Brothers will underwrite the negotiated transaction and Kutak Rock will be bond counsel. The bonds will be priced May 5, David Ardayfio, a vice president in Lehman Brothers office here, said following the press conference.
Michael Kelly, executive director of the housing authority that administers government-owned rental properties but rarely sells municipal bonds, said he expected that the infusion of cash would add 20 years to the life of the affected DCHA properties.
Although the upcoming bond offering will be DCHAs first foray into the PHA capital grant market, Liu noted that the DCHA already successfully leveraged HUD operating grants in late 2000 by obtaining a $30 million loan in anticipation of the grants.
Liu, an assistant secretary at HUD responsible for public housing, the Section 8 voucher program and Native American housing programs, also confirmed yesterday that he is leaving his HUD post at the end of the month to become a senior vice president at Dutko Worldwide, a private consulting firm.
