NALHFA Annual Conference

Transcription

1 NALHFA Annual Conference Financial Market Overview Panel April 28, 2017

2 Disclaimer George K. Baum & Company, Morgan Stanley & Co. LLC, Jefferies LLC, and RBC Capital Markets, LLC (collectively, the Panelists ) are providing the information contained in this document for discussion purposes only and not in connection with the Panelists serving as Underwriter, Investment Banker, municipal advisor, financial advisor or fiduciary to a financial transaction participant or any other person or entity. the Panelists will not have any duties or liability to any person or entity in connection with the information being provided herein. The information provided is not intended to be and should not be construed as advice within the meaning of Section 15B of the Securities Exchange Act of The financial transaction participants should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it deems appropriate. This presentation was prepared exclusively for the benefit of and use by the recipients. By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, the Panelists, their affiliates and the recipient(s) agree that the recipient(s) (and its employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the recipient relating to such tax treatment, structure, or strategy. The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by the Panelists. The information and any analyses in these materials reflect prevailing conditions and the Panelists s views as of this date, all of which are subject to change. To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it. IRS Circular 230 Disclosure: The Panelists and their affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.

3 Financial Market Overview Moderator: Ellen Duffy, Senior Vice President for Debt Issuance and Finance New York City Housing Development Corporation Panelists: Casey Biegelsen, Senior Vice President, National Housing Finance Group George K. Baum & Company Mitch Gallo, Director, Municipal Finance RBC Capital Markets Alan Jaffe, Managing Director and Head of Public Finance Housing & Real Estate Jefferies Susan Jun, Executive Director, Fixed Income & Commodities Morgan Stanley

4 Table of Contents Market Overview Market Update Expanding Investor Base Single Family Structuring Options Multi-Family Structuring Options

5 Municipals Have Outperformed Post the US Election UST and MMD Movement in 2017 YTD January 3, 2017 to April 11, 2017 (bps) Y 5Y 10Y 30Y UST MMD Source: Thomson Reuters, Bloomberg

6 Muni/UST Yields: Ratios Have Moderated and Munis Are Outperforming Date MMD 2 Year 5 Year 10 Year 30 Year UST MMD / UST MMD UST MMD / UST MMD UST MMD / UST MMD UST MMD / UST 2016 Low 0.52% 0.56% 65% 0.79% 0.94% 66% 1.29% 1.36% 81% 1.93% 2.11% 86% 2016 Average 0.73% 0.83% 87% 1.09% 1.33% 81% 1.71% 1.83% 93% 2.54% 2.59% 98% 2016 High 1.22% 1.26% 110% 1.91% 2.07% 104% 2.58% 2.60% 107% 3.35% 3.18% 109% 11/8/2016 (Tuesday of Election) 0.82% 0.86% 95% 1.12% 1.33% 84% 1.71% 1.86% 92% 2.54% 2.63% 97% 12/2/ % 1.11% 109% 1.91% 1.83% 104% 2.54% 2.39% 106% 3.34% 3.06% 109% 4/11/2017 (Current) 0.98% 1.23% 80% 1.45% 1.83% 79% 2.13% 2.30% 93% 2.94% 2.93% 100% Source: Thomson Reuters, Bloomberg

7 Favorable Municipal Market Technicals Municipal Bond Fund Flows Return to Being Positive Lipper Fund Flows 2017YTD = +$1.16 BN Net Weekly Muni Fund Flows ($Bn) 2.0 +$2.5 billion (1.0) (2.0) (3.0) (4.0) -$16.3 billion Source: Lipper

8 Expanding Investor Base Effective strategies to expand investor base Leverage CRA Investors HDC is able to leverage the CRA investors to further improve the bond pricing; we structure bonds to attract CRA interest, which has been mainly in the shortterm tax credit bonds but also expanded to the longer term bonds in recent years Citibank, JP Morgan and Morgan Stanley are the major CRA buyers for HDC bonds Community Capital and AFL-CIO are also frequent buyers for taxable transactions Socially Responsible Investors NYCHDC Sustainable Neighborhood Bonds designation Green Bonds Net Road Shows

9 Sustainable Neighborhood Bond Designation Labeling the Bonds as Sustainable Neighborhood Bonds allows investors to identify and invest directly in bonds that finance socially beneficial projects Each Development financed with Sustainable Neighborhood Bonds will further HDC s mission Sustainable Neighborhood Bonds (2016 Series I-1, 2016 Series I-2-A, Series I-2-B) Each Development is financed under one NYCHDC s Subsidy Programs Certain of the developments receive allocation of the federal 4% Low Income Housing Tax Credits ( LIHTC ) To qualify for a NYCHDC Subsidy Program or for LIHTC (if applicable), a Development must include residential units that are set aside for individuals whose income does not exceed the limitations for such subsidy program or LIHTC Certain of the Developments expected to be financed with the Sustainable Neighborhood Bonds will include attributes that provide environmental benefits Certain Developments have applied for and are expected to receive Enterprise Green Communities ( EGC ) certification Certain Developments have applied for and are expected to receive Leadership in Energy and Environmental Design ( LEED ) certification Tracking/ Reporting/ Investments The proceeds of the Sustainable Neighborhood Bonds will be deposited with the Trustee and invested in Investment Securities (as defined in the POS) until disbursed for each Development or used for redemption Disbursements will be tracked by the Corporation and will be available annually on HDC s website The Corporation will continue reporting updates until all proceeds of the applicable series of Sustainable Neighborhood Bonds have been expended Since its inaugural Sustainable Neighborhood Bonds issuance in June 2015, HDC has had six bond issuances under the Sustainable Neighborhood Bonds designation for a total of over $1.75 billion

10 Rising Interest in Socially-Responsible Investing Green Bonds Energy Efficiency in Buildings Mass Transit Water, Wastewater & Waste Treatment Renewable Energy Resiliency Environmental Protection Sustainability Bonds Social Bonds Education Healthcare Affordable Housing Water Food & Agriculture Information & Communication Tech

11 Rationale for Multi-Family Sustainable Designation Environmental Enterprise Green Communities LEED Certified Social Very Low Target AMI LIHTC Sustainable Multi-Family Bonds Economic Mixed Income Middle Income Work Force Housing Examples of Sustainable Rationale Green / LEED Certified Enterprise Green Communities Reuse of Existing Structures Energy Consumption Tracking Renewable Material Energy Retrofits Targeted AMI LIHTC Supportive Housing Elderly Housing Transit-Oriented Development Revitalization Urban Infill Workforce Housing Mixed Income Economic Development

12 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Evolution of Single Family Structures Relative Value over Time 30 Yr FHLMC Mtg Rates 20 Yr Ins Hsg Bond Rates 10-Yr Treasury YTD Treasury Yield Curve (0-20Yr) Pre-Crisis Pushing Boundaries Financial Crisis New Reality Tax-exempt, plain vanilla MRB s Sub-prime Mortgages, Housing Bubble NIBP, TCLP Pass-through Bonds Tax-exempt and taxable combined VRDO, Auction Rate Taxable MBS market Over-collateralized MRB s with PACs Simple Senior/subordinate Derivative products, SWAPs TBA market used to hedge interest rate risk MBS vs Whole Loan Sales Simple Mortgages Multi-lien Indentures Focus on DPA - stay relevant 2 nd Mortgages, Private Placements Sources: Thomson Reuters, Freddie Mac, US Treasury

13 Converting Loans into Cash MBS and Whole Loan Sales MBS Markets Specialized Pools Qualified vs. non-qualified Specific FICO Scores Specific Locations CRA-Specific Hedging Whole Loan Sales 2 nd Mortgage portfolios Must be Due on Sale or Amortizing Way to convert assets to CASH Note backed by loans Disclosure Prepayment Speeds Servicing

14 Pricing Comparison Recent Single Family Funding Alternatives Funding Type Pass-Through MR Bond Overcollateralized Traditional MR Bond - Bond MBS Tax Status Tax Exempt Tax Exempt Tax Exempt Taxable Average Coupon 3.400% 3.540% 3.610% 4.000% TIC (100% FHA) 2.925% 2.853% 3.748% 3.458% Price % % % % Cash up front (incl. COI) 0.990% 0.990% 1.237% 0.375% Net Price to Issuer % % % % Pricing Date 11/16/2016 3/13/2017 2/16/2017 3/13/2017 Rating Double A+ Triple-A Triple-A Double-A+ Collateral GNMA/FNMA MBS FHA Whole Loans GNMA II Benchmark 10 Year Treasury 10 Year Treasury 10 Year Treasury 10 Year Treasury Benchmark Date 11/16/2016 3/13/2017 2/16/2017 3/13/2017 Benchmark Value 2.220% 2.620% 2.450% 2.620% Spread 0.705% 0.233% 1.298% 0.838% NOTE: True interest cost (TIC) is approximate and is run at 100% FHA, factoring in COI. Yields are based on public data and certain reasonable assumptions. No claim is made as to the accuracy of this data.

15 Single Family Structuring Options New Money Structuring Options Structure Description Considerations Estimated Cost of Funds 1 Traditional Serials, terms and PAC bond Currently does not produce a competitive mortgage rate 3.00% % Modified PAC Serials, terms and oversized PAC based on additional mortgage collateral or indenture surplus Savings of bps versus Traditional Structure, depending on overcollateralization; requires overcollateralization 2.70% % Pass-Through Monthly pass-through of P&I No ability to cross-call or manage across a portfolio 2.70% 2.80% Interest Rate Swap Replace term bond with swapped variable rate debt with swap termination options in 5-10 years Savings of bps, assuming 25% swapped; exposure to amortization, counterparty and potential bank risks 2.65% % 2 Unhedged Variable Rate Bonds Back-loaded variable rate bonds with or without Interest rate cap Savings of bps, assuming 25% VRDN; exposure to interest rate and potential bank risks 2.50% % 3 Interest Rate Cap Replace term bond with capped variable rate debt Savings of bps, assuming 25% capped; better economics than swap; exposure to amortization, and potential bank risks 2.65% % 2 (1) Assumes prepayment at 100% FHA (2) Assumes liquidity fees of 50 bps and remarketing fees of 7-10 bps (3) Assumes VRDBs are backed by an LOC and trade at 15yr average of SIFMA + 50 bps

16 True Interest Cost (TIC) Ginnie Mae CLC & PLC Rates and Indicative Housing Bond TIC Ginnie Mae CLC & PLC Rates and Indicative Housing Bond TIC Present 6.00% 5.50% 5.00% Ginnie Mae CLC Rates Indicative Housing Bond TIC Ginnie Mae PLC Rates Average Pass-through Pricing 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% Jan-14 Apr-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

17 Common Conduit Executions Private Placement GNMA Cashcollateralized Structure Fannie Mae MBS Freddie Mac TEL Back-to-Back Overview Direct purchase by bank or other investor in loan or bond form Unrated with minimal cost of issuance Drawdown structure lowers negative arbitrage Typically 17-year term and longer amortization Issue short term tax-exempt bonds to generate 4% LIHTC Bond secured by proceeds of GNMA security (FHA Insured) Davis-Bacon wages year term and amortization Each project loan packaged into MBS instead of Credit Enhancement Instrument MBS secures taxexempt pass-through bond which generates 4% LIHTC Typically 17-year term with longer amortization Direct loan purchase by Freddie Mac through lender network Can be paired with bank direct purchase as a permanent loan forward Loan will be part of securitization Typically 17-year term and longer amortization Direct loan purchase from Issuer Loan will be securitized at permanent conversion through any number of permanent loan options, including Freddie & Fannie Typically 17-year term or longer Strengths Potentially attractive pricing Limited documentation Avoids public offering criteria & reporting Benefits from GNMA market rates but with traditional bond process and David-Bacon Market in development with current rates bps below traditional tax-exempt Rates and forward structure are attractive but what s in store for future with GSE reform and program maturity Rates and forward structure are attractive Drawdown feature Challenges Highly dependent on CRA and return targets Traditional bond process David-Bacon Market in development What s in store for future with GSE reform and program maturity? As with all conduit executions, state HFAs experience reduced revenues

18 HFA Direct Lending Models General Obligation Bonds Structured Finance Open Indenture FHA Risk-Share Overview Use G.O. rating to fund loans through debt issuance Structure to rating agency criteria to achieve ratings Overcollateralized Indenture with insured and uninsured loans Use unique insurance product for HFA loans to secure debt Strengths Direct underwriting Potentially more straightforward disclosure Structuring flexibility No DSRF Minimal capital Favorable rating agency view of affordable housing Criteria change risk Challenges with more depressed areas Build up of wealth through spread earnings over time Program underwriting flexibility Structuring flexibility Unique tool with 100% federal guarantee Developing pass-through market Programmatic efficiency with 50/50 program Little capital with 90/10 program Access to Federal Financing Bank Challenges Municipal cost of funds Statute change required? Typically lower leverage A rating cap Municipal cost of funds Need for capital Value takes time Municipal cost of funds Davis-Bacon wages or need to cover construction risk Initial set-up with FHA/HUD Example Iowa, Howard County Non-profits NYC, NYS, CT, MI, NJ CO, MA, MD, NYC, IL, DC

19 Several Credit Enhancement Options Exist Affordable multifamily developments can be financed using multiple executions Federal Housing Administration ( FHA ) Fixed rate only, fully amortizing loans 221(d)(4): 223(f): 223(a)(7): New construction or substantial rehab Up to 3 year construction period + up to 40 year amortization Typically 87% - 90% LTV, DSCR for affordable and rental assistance properties Permissible loan constraints can be impacted by equity underwriting Acquisition with moderate rehab 35 year amortization Typically 85% - 87% LTV, DSCR for affordable and rental assistance properties Permissible loan constraints can be impacted by equity underwriting Refinance of existing HUD debt, no cash out permitted, term can be extended but not beyond initial term Fannie Mae & Freddie Mac Fixed & variable rate Balloon maturities permitted, approximately 25 bps slope between 17 and 30 year part of municipal curve Both GSEs: No assumption of construction risk Third party construction lender required on new construction or Vast majority of transactions issued in fixed rate mode Approximately 85% LTV, DSCR Fannie Mae Pass-Through Bond (Fannie Mae MBS as Tax Exempt Bond Collateral) Fannie Mae Reduced Occupancy Affordable Rehab ( ROAR ) execution eliminated construction loans for stabilized properties with up to $120K/unit Freddie Mac Direct Purchase of Tax Exempt Loan ( TEL ) Program provides a forward rate lock feature Bank Letters of Credit Construction financing Sometimes driven by CRA need for LOC bank Typically short in tenor

20 Recent Publically Offered Multi-Family Executions Tax Exempt Fannie Mae MBS Pass-Through Bond Traditionally utilized for conduit financings of standalone multifamily projects for which a 3rd party construction lender is not required First used for Illinois Housing Development Authority in January 2015, more than $115 million of the product since underwritten with strong ongoing investor appetite Fannie Mae MBS pledged as bond collateral (no investor option for MBS substitution of tax exempt bond) Bond is structured to mimic a traditional FNMA multifamily MBS and is priced to its average life (approximately years) Monthly pass-through of principal and interest Can be sold at par or a slight premium Tax-Credit Bonds Recent market conditions have allowed for a cheaper cost of fund in the traditional taxable market as compared to the tax exempt market 4% LIHTC require issuance of tax exempt mortgage revenue bonds Tax exempt bond issued in conjunction with traditional financing Proceeds from conventional loan fund bond principal and interest due to maturity Tax exempt bond proceeds fund project costs Bond can rely on resolution strength, rather than cash collateral, for large highly rated issuers (NYC HDC, MN HFA, MD CDA) Tax exempt bond proceeds limited to pass 50% Test to preserve volume cap Utilization of FHLB System Construction financing provided by a bank via a direct pay LOC The Federal Home Loan Bank of appropriate jurisdiction can then provide a confirming LOC as additional credit support On fixed rate offering, this helps garner a top tier credit rating (FHLB of San Francisco rated Aaa/P-1 by Moody s) Additional cost of the confirm can be passed along to developer, but lower yield on the offered bond can offset the FHLB fees In a VRDO, the confirm can help provide last-to-be-put reassurance in the event of a market disruption or credit downgrade to the LOC/construction bank Permanent financing can be taxable or tax exempt

21 Federal Financing Bank FHA Risk Share Program Direct Placement Options Execution for larger issuers with solid balance sheet and direct lending programs HFA controls loan underwriting process in exchange for sharing in risk with FHA (traditionally 50/50) Risk Share loans cannot be securitized into MBS Federal Financing Bank ( FFB ) can purchase Risk Share loans under ongoing initiative Approximately 10 year Treasury yield bps No construction risk Ability to offer forward commitment, but not forward rate lock Use of derivative to partially hedge interest rate risk during construction Freddie Mac TEL Direct Purchase of Tax-Exempt Loans Fixed-rate loans underwritten to 1.15x debt service coverage and 90% maximum loan to value; variable-rate option underwritten to 1.20x debt service coverage and 85% loan to value with an interest rate hedge required Ability to forward rate lock months Direct Bank Financings Banks can directly purchase tax exempt bonds Often CRA driven Construction / Perm financing Credit enhancement is unlikely to be required Fixed or variable/floating rate executions, though hedge very likely needed to mitigate interest rate risk (by both lender and LP) Tenor of financing extends through LIHTC compliance period If same bank is LIHTC investor, can create Substantial User issue, inability to take both tax exemption on bond interest and utilize tax credit

22 Fixed vs. Variable Rate Executions Risk tolerances, loan proceeds, and form of credit enhancement will help dictate interest rate mode of bonds Fixed Rate Variable Rate Pros: Locked in funding cost of life of transaction Pros: Traditionally lower cost of fund Several potential executions (HUD, GSE, HFA balance sheet lending) Lower cots of funds can produce additional spread and loan proceeds No need for variable rate liquidity support Known cost of funds and interest expense for LP equity providers Fewer transaction participants and lower professional fees Cons: Traditionally higher cost of funds Higher cost of funds can erode spread and loan proceeds Cons: Assumption of added risk (counterparty risk, remarketing risk, renewal risk, basis risk) Interest rate hedge likely to be required Credit enhancement could still be required Limited universe of bond credit enhancers Additional transaction participants and costs Addition rating agency stress runs

23 Variable Rate Liquidity Options Bonds issued in variable rate mode will require liquidity support Municipal Housing Issuer Top Liquidity Providers Amount Liquidity Provider Outstanding ($000) Fannie Mae 8,939,306 Freddie Mac 5,293,544 Federal Home Loan Bank 2,248,243 Landesbank 1,622,000 Wells Fargo 1,184,370 Bank of America 1,072,240 J.P. Morgan 870,095 Citi 720,286 Royal Bank of Canada 718,005 U.S. Bank 188,550 Source: Bloomb erg, 4/17/2017 The liquidity market for both single family and multifamily municipal issuance remains dominated by the GSEs Direct Pay Letters of Credit ( LOC ) Bank provides a facility to directly pay bondholders each payment date Reimbursement agreement between borrower and LOC bank Termination and default provisions arranged between borrower and bank Credit exposure to LOC bank, downgrades can cause tenders and bank bonds Standby Bond Purchase Agreement ( SBPA ) Bank provides a facility to standby as buyer of last resort for failed remarketing High investment grade underlying credit rating needed Termination and default provisions arranged between borrower and bank Credit exposure to SBPA bank, downgrades can cause tenders and bank bonds Confirming Letter of Credit A letter of credit for a letter of credit Credit rating on bonds is linked to credit rating of confirming LOC provider Belt and suspenders for investors if LOC bank fails to honor a draw One time draw Tenders can still happen