CHICAGO - The South Dakota Housing Development Authority recently was able to price a $113 million sale of notes and long-term bonds as other state housing agencies continue to postpone deals in a market largely shunning long-term housing debt.
The triple-A rated SDHDA scaled back its regular $100 million long-term bond issuance to $50 million in order to generate enough cash to continue its homeownership program while taking less of a hit on the relatively high interest rates in the current market.
At the same time, the agency sold $63 million of short-term notes, set to mature next year, allowing it to preserve its private-activity volume cap for the year, according to the agency's long-time director, Mark Lauseng.
Merrill Lynch & Co. was senior manager on the sale, which priced in mid-November and is scheduled to close tomorrow. Citi was co-senior, and JPMorgan, Dougherty & Co., and Wells Fargo Brokerage Services LLC rounded out the underwriting team. Financial adviser is Tom Caine from Caine Mitter & Associates Inc. Bond counsel is Kutak Rock LLP.
The notes captured a yield of about 2.5% and the bonds 6.25%. In a less turbulent market, the SDHDA generally would expect to pay around 5.5% or lower, Lauseng said. The bonds sold almost entirely to retail investors, reflecting a lack of interest among institutional investors for housing sector debt.
"There's a lot of fear out there right now, and [most state housing agencies] can't sell bonds at a competitive rate," Lauseng said. "There seems to be a retail market but not an institutional one."
Noting that many state housing agencies continue to enjoy relatively strong portfolios, he said agencies across the country are nevertheless "paying the price" for the steep rise in bad mortgage loans even if their own delinquency or foreclosure rates are low by comparison.
"There are a lot of bad loans out there, and we're paying the price for those," Lauseng said. "There's a fear factor, and when you try to sell the bonds, the market isn't there."
In conversations with other state housing directors, Lauseng said many worry about the current lack of interest and trust among both traditional bond buyers and banks. He said his agency was able to sell its bonds in part because of its triple-A rating from Standard & Poor's and Moody's Investors Service as well as the relatively small size of the bond issue.
The transaction will be the SDHDA's last for the year, as officials hope to enter a more stable market in the spring with the next long-term issue and to refinance its notes. Typically the agency sells three $100 million bond issues annually.
"This money will last us for awhile, and at these rates we won't go out," Lauseng said.
His agency benefits from a 0.49% delinquency rate among homeowners late by 91 days or more and a 0.48% foreclosure rate, according to Moody's. Part of the financial strength derives from South Dakota's relatively strong economy and a regional housing market that has been more stable over the last several years.
Both the notes and bonds are secured by a pledge of the SDHDA's revenues, acquired mortgage loans, funds, and accounts - including its capital reserve fund and mortgage reserve fund, both of which are overfunded and have never been tapped, according to Moody's. The agency has roughly $1.7 billion in outstanding debt under its homeownership mortgage bond program.
In addition to strong reserves and low foreclosure rates, the SDHDA's portfolio is heavily insured, Moody's said. As of mid-2008, it had just over 17,000 mortgage loans outstanding, totaling $1.364 billion.