Client Since: 1994

 

FirstSouthwest’s success in housing is perhaps best exemplified by its extensive involvement in the State of Alaska. The Firm has provided guidance on more than 44 bond issues totaling more than $5.18 billion. FirstSouthwest also has negotiated more than $480 million of floating-to-fixed rate swaps on behalf of Alaska Housing Finance Corporation (AHFC). AHFC has taken advantage of many of the innovative developments for housing issuers.

 

AHFC was originally developed to help families find homes after World War II. It has evolved into an organization that now contributes more than $100 million annually to Alaska’s state revenues through cash transfers, capital projects and debt-service payments.

 

Since 1986, it has contributed more than $1.9 billion to the state in the form of direct dividends going into the general fund; providing funds to the state for capital improvements; bonding for projects such as university student housing; purchasing state assets; and deferred maintenance of state-owned property.

 

Since the first tax-exempt housing revenue bonds were issued in the early 1970s, most HFAs have typically desired loan rates 75 to 100 basis points lower than the rates on conventional home loans so they can remain competitive. Beginning in the 1990s, however, that spread became increasingly difficult to maintain. Interest rates steadily dropped while home purchase prices increased. The low interest rate environment generated more demand from potential buyers who were also looking for flexible loan programs to make purchasing a home more affordable. Commercial banks and mortgage lenders responded by providing non-traditional financing such as adjustable rate mortgages and interest-only mortgages.

 

In this environment, AHFC was challenged to continue providing competitive rates on its traditional 30-year mortgages. Needing to borrow debt at a lower cost, AHFC began looking at its financing alternatives. In 2006, AHFC had fixed rate debt of more than $482 million that had been issued in 1997 and 1999. The debt was optionally callable in 2007 and 2009 which presented AHFC with an opportunity to restructure the debt at a lower cost.  

In early 2006, forward premiums for forward starting swaps and forward bond purchase agreements were at historic lows. AHFC had pre-Ullman debt (funds issued before the Tax Reform Act of 1986) optionally callable on June 1, 2007 and June 1, 2009. In March 2006, FirstSouthwest, on behalf of AHFC, competitively bid a $239.3 million forward starting swap beginning June 1, 2007 and a $242.6 forward starting swap beginning June 1, 2009.

 

FirstSouthwest examined a database of historical trading patterns of AHFC’s variable rate debt and through regression analysis determined that 70 percent of LIBOR was the appropriate floating index. The swaps were structured to mirror the amortization on the underlying debt, taking into account the 35-year rule for variable rate debt along with the 54-year rule for pre-Ullman debt. Given the size of the swaps, AHFC desired to spread its counterparty risk among different entities as opposed to awarding 100 percent of the swap to any one entity. Therefore, the winning bidder was entitled to an initial 40 percent. In order of bid result, other counterparties were allowed to match the winning bid up to 30 percent of the notional amount.

 

AHFC received five bids for each swap. The pricing was very tight. On the 2007 bid, the cover was 0.2 basis points higher in rate. AHFC locked into a refunding rate of 3.673 percent for its 2007 refunding and 3.683 percent for its 2009 refunding. As this demonstrates, the forward premium for locking in three years out was only one basis point higher than the premium for locking in one year out.

 

As a result of entering into the forward starting swaps, AHFC was able to lock in to low cost of funds for 30 years. The proceeds of the 2007 and 2009 variable rate demand obligations were then blended with new money fixed rate bond issues, generating below conventional market mortgage rates. This financing allowed AHFC to continue to offer competitive mortgage rates and generate affordable housing for low- and middle-income Alaskan families and individuals.