CHICAGO — The Ohio Housing Finance Agency will take institutional orders Thursday on $130 million of mortgage revenue bonds offered under the federal new issue bond program, marking the agency’s first — and likely its only — new-money transaction of the year.

The agency took retail orders Wednesday. The issue included $36 million of serial bonds with maturities under 10 years, a structure meant to attract retail buyers. The OHFA plans to refund $90.6 million of variable-rate debt next week, keeping it variable while shifting it from taxable to tax-exempt. JPMorgan is underwriter.

The agency heads to market amid news that Moody’s Investors Service put the Aaa rating on $3 billion of the OHFA’s residential mortgage revenue bonds on watch list for possible downgrade, warning that the agency faces exposure to problems with its guaranteed investment contracts issued by Pallas Capital Corp. Moody’s downgraded Pallas to Baa3 on Oct. 1.

Ohio’s is one of several housing agencies across the country with exposure to possibly troubled GICs. Since Oct. 4, Moody’s has put on watch for possible downgrade at least $4.1 billion of mortgage revenue bonds issued by HFAs with GICs issued by Pallas or Depfa PLC, which Moody’s downgraded to Baa3.

The debt includes $3 billion issued by the OHFA, $1.1 billion issued by local housing agencies across the country, and $23 million issued by the Mississippi Home Corp. Another $123 million issued by the Dormitory Authority of the State of New York and Elizabeth City, N.C., is on watch due to GICs issued by Depfa.

In an interview Wednesday, OHFA’s debt director said the agency plans to terminate its GICs with Pallas. OHFA has $43 million invested in the GICs, down from $106 million earlier this year.

“We got a written response [Wednesday morning] from Pallas saying that they do not intend to take any action [to address the downgrade], so we have now begun the process of terminating those GICs,” said Bob Connell. “That $43 million will then be invested in other permitted ­investments.”

Moody’s said it will keep the debt on watch list to review the impact on OHFA’s cash flows of terminating the GICs and confirm their termination.

Citi will lead Thursday’s $130 million bond sale. The bonds are part of $500 million sold in 2009 under the NIBP. Another $195 million will be sold to the Treasury Department in accordance with the program’s rules that caps the Treasury’s purchase at 60%, with 40% to be sold on the open market.

The Obama administration launched the program late last year to boost housing finance agency issuance of bonds for affordable housing sheltering low- to moderate-income families. Under the program, the Treasury agreed to buy state and local HFA bonds through Fannie Mae and ­Freddie Mac.

The NIBP required issuers to sell the bonds, usually short-term, by the end of 2009. Proceeds would be placed in escrow, and, under recently changed rules, each issuer is allowed to go to market up to six times through the end of 2011 to convert the securities to long-term debt.

“The NIBP program has created a new paradigm,” Connell said. Initially, each issuer was allowed to go to market three times to convert the debt, and OHFA has been “warehousing” its mortgages. 

“We didn’t want to waste it and we wanted to make it economically worthwhile,” he said. “Now they’ve extended it, which is a blessing. We’ll probably take full advantage of the extra opportunities.”

New rules also allowed agencies to lock in lower interest rates tied to the 10-year Treasury bond. OHFA’s interest rate dropped to 3.07% from 4.05%.

“It has lowered our costs, and that’s very important, but the fact that the program was extended throughout next year is also equally advantageous,” Connell said. “For HFAs to have to use up all of those single-family NIBP dollars within the last 12 months, in the mortgage market that we’ve been in, was proving to be very difficult.”

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