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2016 HFA Institute Single-Family Financing Essentials: MRBs Current Market & Executions January 14, 2016 Disclaimer RBC Capital Markets, LLC (“RBC CM”) is providing the information contained in this document for discussion purposes only and not in connection with RBC CM or Royal Bank Canada serving as Underwriter, Investment Banker, municipal advisor, financial advisor, swap counterparty or fiduciary to a financial transaction participant or any other person or entity. RBC CM 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 1934. 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 internal use by the recipient. This presentation is confidential and proprietary to RBC Capital Markets, LLC (“RBC CM”) and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCM’s express written consent. By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, RBC CM, its affiliates and the recipient agree that the recipient (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 RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CM’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: RBC CM and its 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. Financing MRBs I January 14,8,2016 Colorado Housing andEssentials: Finance Authority | January 2016 1 |Single-Family RBC Capital Markets RBC Capital Markets, LLC Market Conditions Will Drive Pricing Levels for an MRB Issuance On December 15, 2015, the Federal Reserve raised interest rates for the first time in nearly a decade 10-Yr “AAA” MMD & 10-Yr Treasury January 1, 2013 to Present Shift in “AAA” MMD & 10-Yr Treasury Since January 2015 3.5% 2.6% Treasury 10 yr AAA GO 10 yr 2.4% 3.0% 2.2% 2.5% 2.0% 2.0% 1.8% 1.5% 1.6% 1.0% 1.4% Jan-16 Dec-15 Nov-15 Oct-15 Sep-15 Aug-15 Jul-15 Jun-15 May-15 Apr-15 Mar-15 Feb-15 Jan-15 0.5% 0.0% Jan-16 Dec-15 Nov-15 Oct-15 Sep-15 Aug-15 Jul-15 Jun-15 May-15 Apr-15 Mar-15 Feb-15 Jan-15 Dec-14 Nov-14 Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 Apr-14 Mar-14 Feb-14 Jan-14 Dec-13 Nov-13 Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Source: TM3, Thomson Reuters 10, year “AAA” MMD and 10 year Treasury shown to represent different average lives of municipal transactions Rates as of January 12, 2016 Financing MRBs I January 14,8,2016 Colorado Housing andEssentials: Finance Authority | January 2016 2 |Single-Family RBC Capital Markets RBC Capital Markets, LLC HFAs Can Utilize Numerous Approaches for a Fixed Rate Offering Fixed Rate Mortgage Revenue Bond Issue Without Structure 30 year level debt service Serial and term bonds Higher cost of funds No PAC bond Cross-calling Bond proceeds can acquire fully originated loan portfolio or acquisition fund (MBS or Whole Loan) Extended delivery (up to 6 or 7 weeks without pricing penalty) to mitigate negative arbitrage in acquisition fund Fixed Rate Mortgage Revenue Bond Issue With Structure 30 year level debt service Serial and term bonds Issuance will include a PAC bond Some limited ability to cross-call Bond proceeds can acquire fully originated loan portfolio or acquisition fund (MBS or Whole Loan) Extended delivery (up to 6 or 7 weeks without pricing penalty) to mitigate negative arbitrage in acquisition fund MBS Pass-Through Bond 30 year debt service One single maturity; par and premium structures Monthly redemptions from underling GNMA and GSE MBS Underlying collateral and average life expectations drive bond pricing Fully originated MBS portfolio required at bond settlement, though can sell blind pools No cross-calling Extended delivery (up to 6 or 7 weeks without pricing penalty) Ability to dual track production with TBA and asset sales Financing MRBs I January 14,8,2016 Colorado Housing andEssentials: Finance Authority | January 2016 3 |Single-Family Lower cost of funds Capital Markets RBCRBC Capital Markets, LLC The Tax Exempt Variable Rate Market Has Remained Stable and Can Reduce Interest Costs The weekly SIFMA index has been set at 0.01% since October 23, 2015 Shift in Weekly SIFMA & 30-Day LIBOR Since January 2015 Weekly SIFMA & 30-Day LIBOR January 1, 2013 to Present 0.5% SIFMA 0.5% 30-Day Libor 0.50% 0.45% 0.4% 0.40% 0.4% 0.35% 0.3% 0.30% 0.3% 0.25% 0.20% 0.2% 0.15% 0.2% 0.10% 0.1% 0.05% 0.1% 0.00% Jan-16 Dec-15 Nov-15 Oct-15 Sep-15 Aug-15 Jul-15 Jun-15 May-15 Apr-15 Mar-15 Feb-15 Jan-16 Dec-15 Nov-15 Oct-15 Sep-15 Aug-15 Jul-15 Jun-15 May-15 Apr-15 Mar-15 Feb-15 Jan-15 Dec-14 Nov-14 Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 Apr-14 Mar-14 Feb-14 Jan-14 Dec-13 Nov-13 Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Jan-15 0.0% Source: TM3, Thomson Reuters, SIFMA Weekly SIFMA Index and 30 day LIBOR shown to represent different average lives of municipal transactions Rates as of January 12, 2016 Financing MRBs I January 14,8,2016 Colorado Housing andEssentials: Finance Authority | January 2016 4 |Single-Family RBC Capital Markets RBC Capital Markets, LLC A Judicious use of Variable Rate Debt is Viable Approach for Select HFAs Selected Recent Housing Issues Date 05/21/2015 Issuer North Dakota Size Use of Funds $ 63,800,000 New Money $ Fixed Rate Variable Rate 46,100,000 $ 17,700,000 Variable % 28% Bond Yield Facility Tenor RBC Role 2.71% 7 Senior Manager, Direct Purchaser of FRN, Swap Counterparty 2.89% 7 Senior Manager, SBPA Provider, Swap Counterparty 2.88% 7 Senior Manager, SBPA Provider, Swap Counterparty 2.84% 2 Swap Counterparty 07/23/2015 Connecticut $ 160,800,000 New Money/Refunding $ 115,800,000 $ 45,000,000 28% 07/30/2015 Minnesota $ 124,550,000 New Money/Refunding $ 106,325,000 $ 18,225,000 15% 08/18/2015 Iowa $ 121,055,000 New Money/Refunding $ 81,055,000 $ 40,000,000 33% 09/04/2015 Wisconsin $ 202,855,000 New Money/Refunding $ 158,650,000 $ 44,205,000 22% 2.49% 7 11/24/2015 Minnesota $ 171,445,000 New Money/Refunding $ 136,445,000 $ 35,000,000 20% 2.56% 7 Senior Manager, SBPA Provider, Swap Counterparty Senior Manager, SBPA Provider, Swap Counterparty Treasury and Housing Bond Rates* 4.50% 4.00% 3.50% 3.00% - 94 bps - 69 bps North Dakota 2.71% Connecticut 2.89% - 60 bps Minnesota 2.88% - 61 bps Iowa 2.84% - 107 bps - 79 bps Minnesota 2.56% Wisconsin 2.49% 2.50% 2.00% 1.50% 1.00% May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 30-Year Non-AMT Housing Bond Bond Yield for 30-Year Fixed Rate Level Debt With Premium PAC Pass-Through Bond 10-Year Treasury Financing MRBs I January 14,8,2016 Colorado Housing andEssentials: Finance Authority | January 2016 5 |Single-Family * Source: RBC CM and Bloomberg (for 10 Year Treasury Yields) RBC Capital Markets RBC Capital Markets, LLC Refunding Opportunities HFAs can undertake current refundings of tax exempt, private activity mortgage revenue bonds A refunding can create excess spread 1.125% of spread is permitted on single family MRB issues A refunding will lower the bond yield, while the loan characteristics of the transferred mortgage pool is remains largely unchanged Excess spread can be utilized to subsidize new mortgage loan productions at attractive lending rates Subsidized new money issuance at the time of the refunding 0% pool Economics of a refunding can be enhanced with over-collateralization or use of structure and/or variable rate debt 2006 saw record municipal single family issuance – refunding opportunities exist as we approach 10 year optional redemption dates Single Family Municipal Bond Issuance ($MM) Source: Thomson Reuters Financing MRBs I January 14,8,2016 Colorado Housing andEssentials: Finance Authority | January 2016 6 |Single-Family RBC Capital Markets RBC Capital Markets, LLC Summary of Hypothetical Structure Options New Money Bond Structures in Current Market Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Traditional T/E Serials Tax-Exempt Swap with SBPA Pass-Through w/ backloaded PAC Taxable Pass-Through Scenario 6 Scenario 7 Traditional 30-Year, Level Debt Service Over collateralized Front Loaded Serial, Term and Total Loans $50,000,000 $62,500,000 $50,000,000 $50,000,000 $50,000,000 $50,000,000 $50,000,000 Serials Terms PAC Pass-Through Bond VRDO Total Bonds $11,065,000 $26,595,000 $12,340,000 $0 $0 $50,000,000 $21,460,000 $7,240,000 $21,300,000 $0 $0 $50,000,000 $0 $0 $0 $50,000,000 $0 $50,000,000 $10,555,000 $6,760,000 $16,710,000 $0 $15,975,000 $50,000,000 $0 $0 $0 $50,000,000 $0 $50,000,000 $0 $0 $0 $50,000,000 $0 $50,000,000 $10,555,000 $6,760,000 $16,710,000 $0 $15,975,000 $50,000,000 Overcollateralization ($) - $12,500,000 - - - - - Swap Rate Liquidity Fees Remarketing Fees - - - 2.33% 0.65% 0.10% - - 3.39% 0.65% 0.10% Bond Yield 3.21% 2.42% 3.00% 2.78% 3.25% 3.25% 3.68% Full Spread Loan Rate (w/ 1 point) 4.33% 3.54% 4.09% 3.90% 4.34% 4.34% 4.81% Premium Taxable Serials Taxable Swap with SBPA Pass-Through w/ backloaded PAC Notes: Global - Bond coupons as of January 4, 2016; bond yields shown assume excess residuals are used to redeem bonds; assumes 100% GNMA loans with 1point and 50bps servicing fee PAC bond assumes a 4% coupon and is priced at 100% PSA to yield 2.10% (plus 91bps to 5 year MMD) Scenario 1 - Traditional 30-year level debt structure Scenario 2 - Structured at 0% PSA; overcollaterization assumes a WAM of 240 months and a weighted average loan rate of 6.00%. Scenario 3 - Tax-exempt monthly pass-through structure priced at par to yield 3.00% Scenario 4 - Tax-exempt, structured at 0% PSA, par termination rights in swap (coterminous with liquidity) assumed to be 2.33% (.20% during the first 3 months), 65bps RBC liquidity facility, 10bps remkt. fee, Total Swap Cost = 3.08%. Scenario 5 - Taxable monthly pass-through structure priced at par to yield 3.25% Scenario 6 - Taxable monthly pass-through structure at premium, priced (up to 105%) at 100% PSA to yield 3.25% Scenario 7 - Taxable, structured at 0% PSA, par termination rights in swap (coterminous with liquidity) assumed to be 3.39% (.20% during the first 3 months), 65bps RBC liquidity facility, 10bps remkt. fee, Total Swap Cost = 4.14%. Each structure has its pros and cons, and should be evaluated based upon program requirements and risk tolerances of each HFA. Financing MRBs I January 14,8,2016 Colorado Housing andEssentials: Finance Authority | January 2016 7 |Single-Family RBC Capital Markets RBC Capital Markets, LLC Why Mortgage Revenue Bonds? Add spread producing assets to HFA balance sheets Some HFA balance sheets have decreased 50% or more in recent years Reliable income stream realized over life of loans HFAs can dual track mortgage loan production with TBA and other sales Potential uncertainty of TBA market once Fed stops its purchases Moody’s pointed out in late 2014 that if HFAs do not return to their previous business model of financing onbalance sheet mortgage loans to create a more predictable revenue stream to help support their operating costs, their portfolio performance could dip. Moody's says such a dip could lead to a negative sector outlook Financing MRBs I January 14,8,2016 Colorado Housing andEssentials: Finance Authority | January 2016 8 |Single-Family RBC Capital Markets RBC Capital Markets, LLC