S&P Report: PHA-HUD Grant Deals Are Rapidly Gaining in Popularity

WASHINGTON - The securitization of federal public housing grants by public housing authorities is "hitting its stride," according to a new report from Standard & Poor's that offers a retrospective look on the innovative financing technique that was born just over two years ago.

Almost 50 PHAs have entered capital markets using the financing approach since the Chicago Housing Authority sold $298 million in bonds in the first such deal in late 2001, according to the report by Jeffrey Previdi and Valerie White, directors at the credit agency.

The Bond Buyer named Chicago's capital program revenue bond issue as its Deal of the Year in 2002. The largest of the deals to date was the Puerto Rico Housing Finance Authority's $685 million capital grant financing bond deal that sold last month. The authority issued the bonds on behalf of the Puerto Rico Public Housing Administration.

Transactions that leverage future payments from the U.S. Department of Housing and Urban Development are "coming of age," White said in an interview yesterday. The credits are "relatively strong," and PHAs are utilizing this vehicle increasingly nowadays in order to get funds for needed repairs and to attract equity contributions for various projects, she said. Some PHAs use the funds raised for much-needed rehabilitation work, instead of having to rely solely on their ongoing capital budgets.

A critical credit consideration when assessing a deal is whether the agency earmarks its funds within the deadlines established by HUD, the report said. For example, failing to earmark 90% of the funds within 24 months of receiving them from HUD can trigger a withholding of all capital funds by the department, it said.

Some of these deals selling nowadays are pooled transactions in which multiple PHAs access the municipal market at the same time, the report said. Pooling allows the agencies to reduce issuance costs but does not necessarily improve creditworthiness because each PHA's debt service is structured individually without relying on another agency's funds, the report said.