Public Housing Authority Update
May’s surprisingly weak jobs report and recent dovish guidance from the Federal Reserve continue to buffet bond markets throughout the second quarter of 2019. In the May jobs report, the U.S economy as a whole added only 75,000 jobs, as compared to 224,000 jobs in April. Another very important trend was the dwindling of the labor force; partly as a consequence of employers struggling to fill open slots following the retirement of baby boomers, the unemployment rate dropped to its lowest level in almost fifty years. While the labor market continues to strengthen, however, private-sector payrolls increased only modestly in May (3.1%, the same monthly level for almost a year). This trend of a tightening labor market coupled with mild wage growth and worldwide political and economic malaise continues to vex the Federal Reserve. As global trade volatility continues to rile equity, commodity and fixed income markets, Federal Reserve Chairman Jerome Powell has responded to investors’ demands for a cut to the Federal Funds rate by committing to sustain the economy’s decade-long expansion. While the Fed held rates steady at the June FOMC meeting, hints were given that cuts may be coming in the near future. This forward guidance further mollified bond markets, with benchmarks remaining near two-year lows after seeing highs to close 2018.
Tax-Exempt Benefits: One of the consequences of tax reform has been increased demand for tax-exempt products by investors all throughout the country. A major facet of the 2017 legislation capped the maximum deduction one could claim on State and Local Taxes at $10,000. This deduction cap fell far below what many residents of high-tax states formerly claimed come tax season; as a direct consequence, demand for municipal and tax-exempt bonds has been on the rise in 2019. As illustrated in both the table and chart above, the tax-exempt benchmark AAA MMD rate has decreased far more than its taxable counterpart during the first quarter of 2019. This dislocation is mainly a function of demand, as municipal fund inflows have surged to their highest levels since 1992.
PHAs have taken advantage of this trend in part by financing projects through investment-grade rated tax-exempt public bond offerings. PHAs, subject to state law and organizational bylaws, can issue debt on a tax-exempt basis for a wide range of projects, including both workforce housing and LIHTC projects as well as mixed-income developments sometimes including taxable debt. These financings have included construction debt at low fixed rates as well as leveraging the strong tax-exempt market for permanent financing with terms as long as 30+ years and interest rates below 4%. Structures that leverage the PHA’s strength and current tax-exempt market provide far lower True Interest Costs and typically, lower transactional costs, than comparable traditional transactions available to non-PHA projects and could save significant amounts of money over the life of the financing.
KBCM Transaction Spotlight
- Issuer Name: Housing Authority of Snohomish County (“HASCO”)
- Security: General Revenue Pledge of the Authority
- Closing Date: April 10, 2019
- Par Amount: $68,290,000
- Term: 30 years
- True Interest Cost: 3.70%
- Tax Status: Tax-exempt
Project: HASCO issued its Series 2019 Bonds to secure low-cost fixed-rated permanent financing for their newly acquired 230-unit Carvel Park Apartment complex, located 23 miles north of Downtown Seattle. The property was purchased to support affordable housing within Snohomish County, Washington, which encompasses part of the greater Seattle MSA.
Financing: With the partnership of KeyBanc Capital Markets and Key Government Finance, HASCO was able to quickly secure and close on its 100% Loan-to-Value acquisition financing in September 2018. For its Refunding Bonds (permanent financing), the Authority worked with KeyBanc Capital Markets and S&P Global ratings to secure an ‘A+’ credit rating. Using this credit rating and Key’s capability as the leader in underwriting Public Housing Authorities municipal bonds, the Authority was able to secure 30-year fixed-rate debt at 3.7%. This result was achieved by working with Key as municipal underwriter and balance sheet lender, allowing HASCO to act quickly and efficiently in acquiring and permanently finance the Carvel Park Apartments at rates far below most comparable financing structures.
KBCM’s specialists can help identify and execute the most cost-effective financing solutions for PHA projects.
Sam Adams, Director
Anthony Pass, Vice President
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