Journal of Tax Credit Investing

Paramount fund leads active guaranteed market

Paramount Financial Group has answered the question about its ability to syndicate guaranteed funds in light of recent adverse news about its ultimate parent, General Motors, and its intermediate parent and guarantor, GMAC Commercial Holdings.

In late June, Paramount successfully closed one of the largest single guaranteed funds, a single-investor deal valued at about $200 million. Industry observers had been speculating that the ratings downgrades at GM and GMAC and the announcement that GMAC Commercial Holdings was being marketed for sale would eliminate demand for Paramount's guaranteed product.

Steve Daley, a Paramount vice president of fund syndication, indicated that the firm brought in a third-party guarantor with an Aa rating to wrap the transaction. Daley would identify the guarantor only as a previous Paramount investor. GMAC Commercial Holdings is indemnifying the third-party guarantor, a structure gaining more prominence in the guaranteed market, with Ambac and Merrill Lynch providing similar structures for Lend Lease (now MMA Financial) and Related Capital.

Daley declined to name the investor or the fund's yield, but called the pricing attractive. The transaction escaped notice because the participants sought confidentiality, and the marketing effort was limited and did not involve competitive bidding. Industry sources suggested that Aa-rated funds would trade at about 5.20%, with Aaa-rated funds at 5.00%, using industry-standard assumptions.

Speculation about the possible buyer focused on Fannie Mae, one of a few active buyers with the ability to invest $200 million in a single fund. Lending some support to the rumor, one industry-watcher picked up a rumor that Fannie Mae is out of the guaranteed market for the rest of the year.

Neil Silver, of Capstar Partners in New York, advised Paramount on the transaction. In his view, the Aa rating was a key to the offerings success.

"There are lots of guarantors in the market. For a Aa or better credit, there's plenty of equity, but at less than that, the sale is more challenging," Silver said.

The blockbuster fund was the first guaranteed fund of 2003 for Paramount. The company expects to syndicate $700 million in 2003, with more than half of the volume guaranteed using both a GMAC Commercial Holdings and third-party wrap structure, according to Daley. Paramount also syndicates funds on an unguaranteed basis.

Related Capital is marketing a $100 million fund guaranteed by Merrill Lynch (rated Aa3 by Moody's). Related's affiliate, Charter Mac, is indemnifying Merrill. According to Marc Schnitzer, managing director at Related, the fund is being offered using a bid system, with bids due in late July and a closing expected in early September. The fund is diversified, with Charter Mac acting as the mortgage lender in "virtually all" of the underlying projects. This is the second guaranteed fund offered by Related using this structure. Meridian Investments is advising Related.

The Related guarantee structure operates as a credit-default swap agreement. Standard documentation created by the International Swap Dealers Association is used to document the transaction. According to Schnitzer, the structure is unique but affords the investor the same level of protection.

MMA Financial (formerly named Muni Mae) completed its acquisition of Lend Lease's affordable housing syndication business on July 1. As part of the transaction, Lend Lease, currently rated Baa2 by Moody's, is backstopping a final fund wrapped by Ambac Financial Group. Ambac, a monoline financial guarantee insurer, is rated Aa2 by Moody's. Municipal bonds and other financial obligations guaranteed by Ambac are rated Aaa.

In late May, Moody's placed Lend Lease's U.S. subsidiary and Lend Lease Finance, Ltd. (an Australian corporation), on review for a possible downgrade. However, two Lend Lease guaranteed funds, GAHF II and III, rated in November 2002 and January 2003 respectively, have not been placed on review. GAHF II is currently rated A1 and GAHF III is rated A3. The ability of the guaranteed funds to maintain ratings while a corporate guarantor's finances deteriorate would indicate Moody's confidence in the underlying strength of the original underwriting, asset management, and low-income housing projects to perform generally as projected.

Its acquisition by MMA Financial puts Lend Lease's participation in the guaranteed market in question. Ambac relied on Lend Lease's indemnity and investment-grade rating. MMA Financial is not rated. Martha Shults, who manages the guarantee program for MMA, expects to work out a new arrangement with Ambac. From Ambac's viewpoint, Lend Lease is the only syndicator it has wrapped. However, several syndicators report discussions with Ambac about a guarantee program.

Nationwide Insurance intends to sell $150 million into the guaranteed market in the second half. Issues involving FIN 46, an interpretation of accounting rules that may lead to consolidation of affordable housing investments by investors or guarantors, slowed Nationwide's program in the first half. The Ohio-based insurer hasn't strayed far to find syndicators - it has wrapped properties originated by Apollo Capital. It is also currently marketing a fund made up of Red Capital properties. Bank of America advises Nationwide in its transactions.

Nationwide buys from the two syndicators on a property-by-property basis, warehouses the properties, and selects properties for syndication as a guaranteed fund. An industry advisor described it as the "SunAmerica model" of building a guaranteed fund.

"[The structure] gives us buy rates for warehousing in the 8% range and a quicker close," commented Chris Grim, the director of the program at Nationwide.

Aegon (rated Aa3 by Moody's for insurance strength; Transamerica debt is rated A3) intends to market a $30 million guaranteed fund in the third quarter after sitting on the sidelines in the second quarter. The sale is being conducted for tax- and portfolio-management purposes and consists of direct deals, according to David Kunhardt, vice president of community investments at Aegon USA Realty Advisors. Kunhardt is also president of the Affordable Housing Investors Council.

Kunhardt expressed concern about the possible impact of FIN 45 and 46 on the industry. FIN 45 is a new accounting interpretation dealing with guarantees and FIN 46 deals with consolidation rules that could force investors or guarantors to consolidate affordable housing investments.

"There is lack of resolution. Nobody has the right answer for FIN 46. It could be fatal to the desire to invest because no one wants to consolidate. As for Aegon, we could reconsider both businesses [investor and guarantor]," Kunhardt said.

AIG/Sun America is also in the market. Information about activity at the company well known for its secrecy is limited. Sources believe AIG is marketing about $400 million of Aaa-rated guaranteed investments that will be sold at a yield between 4.75% and 5.00%.
Guarantors have noted that guaranteed yields have not followed generic interest rates down in the last year.

"The Treasury market doesn't have much effect on guarantee yields," observed a guarantor who commented on condition of anonymity. "There is no index that guarantee yields follow."

Steve Daley of Paramount noted the "stickiness" in affordable housing yields in both the guaranteed and unguaranteed marketplace. "Liquidity, [tax base] utilization, limited players, and specialized knowledge impact where yields go," he said.

Although yields have not moved with interest rates, all sources indicated that demand remains very strong. The turmoil over FIN 46 and a softening commercial real estate market may be weighing on the market.

"People see the value of receiving a guarantee. There's better accounting treatment and a lack of real estate worries, all the more valuable if REITs aren't doing well," summarized Aegon's Kunhardt.

Bill Guthlein, CFA, CPA, recently formed WJG Associates, a consulting firm serving the needs of affordable housing investors and guarantors. E-mail WJGassociates@aol.com or call (978) 263-1386.

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