Interest rates on variable-rate debt more than quadrupled in September as credit markets seized up, sidelining multifamily developers looking to tap the bond market to finance their deals. There’s no consensus on exactly when rates will fall back to normal levels, but that’s one of the first things that needs to happen for demand to revive for tax-exempt bonds, according to industry participants.
“Right now, no bond deals can get done,” said Paul Sween, a principal with Dominium, a Minneapolis-based affordable housing developer and manager, in late September. With more than $200 million in seven-day variable rate debt, Dominium has been whacked by skyrocketing interest rates for that paper. The rate on the Securities Industry and Financial Markets Association’s Municipal Swap Index (SIFMA), the benchmark used in resetting rates on variable-rate demand bonds, zoomed from 1.79 percent in mid-September to 7.96 percent two weeks later.
However, Sween was optimistic about the prospects for a turnaround. “I’ve got to believe that in a matter of weeks, that money will flood into [the multifamily bond market], recognizing that risk premiums are all out of whack,” he said. His view seemed on the money this week, as the SIFMA Index reset at 5.74 percent.
The market was virtually deserted in September, said Jean Everett, a partner and public finance specialist at the law firm of Hiscock & Barclay. “The only issuances we’re aware of are those where they couldn’t wait it out, they had no choice,” she said.
Most of her clients were counting on federal lawmakers to adopt a bailout plan before they’d be willing to dip their toes back into the tax-exempt bond waters. The Senate’s passage of a bailout bill this week puts the market one step closer to seeing revived demand.
“I think that things will return to relatively normal conditions even three months out,” said Everett. “It’s just a question of people getting their confidence restored.”
