New York City raised $400 million in debt at a rate of 5.26% Tuesday with the express purpose of financing the construction of 3,000 affordable housing units across four boroughs.
The strong demand for the city’s debt, at a time when the housing market is broadly weakening, is a sign that investors have more confidence in public housing than they do in the private market.
The office of city Comptroller Brad Lander said Tuesday’s event was the city’s first-ever sale of social bonds, a group of fixed-income securities used to support projects with positive environmental or social goals. Social bonds are part of an emerging class of municipal environmental, social and governance bonds, or ESGs, which have been issued to the tune of $36 billion nationwide since 2018.
Marjorie Henning, deputy comptroller for public finance, told Crain’s Tuesday, prior to the sale, that the city had a wide range of interested buyers. A Kuwait sovereign wealth fund and Nuveen had expressed a desire to purchase, according to Lander’s office.
“ESG investors are our first target. We’ve received indications of interest from over $300 million in bonds from ESG investors, but we had over $1.8 billion in indications of interest from taxable buyers,” Henning said. “It’s a really broad range, including overseas.”
She noted that the city was looking at a spread of 155 to 165 basis points (1.65%) over 30-year Treasuries. The city said it expected a yield of about 5% over 30 years. She conceded that interest rates are higher than they were a year ago and that the city likely will be paying more for its debt this month than last October.
“The city has a large capital program. All of the payments are paid from the general fund,” Henning said. “We don’t have the luxury of timing the market. We have to get into the market on a periodic basis to reimburse general fund spending.”
Municipal bond experts including Matt Fabian, a partner at Municipal Market Analytics, said the city is likely to generate continued interest in the coming weeks due to market conditions.
Fabian said state and local governments typically prompt more responses in municipal bond purchases for affordable housing when interest rates are high, or rising, because they are more competitive compared with debt issued by private lenders.
“New York state has a huge program that provides affordable housing loans; these compete with private-sector loans,” he said. “When interest rates are higher, credit conditions are higher on the private side, and the private side becomes less competitive and has less interest in financing affordable loans.”
Housing has been weakening across the board in recent months. The demand for mortgages has fallen 29% in the past year. New-housing sales are at their lowest level since 1952.
“The public option becomes more competitive,” Fabian said.
Affordable focus
All told the city sold $1.35 billion in general-obligation bonds on the open market Tuesday: $950 million worth of tax-exempt, fixed-rate bonds and $400 million in taxable fixed-rate social bonds, which the city plans to use to finance the construction of 16 affordable housing projects, in every bough except Staten Island, according to Lander’s office.
The $400 million social bond sale will largely go toward financing the city Department of Housing Preservation and Development’s Extremely Low- and Low-Income Affordability program, as well as the agency’s Supportive Housing Loan Program for those with who need in-house mental health and counseling, and Senior Affordable Rental Apartments program, officials said.
“Our loans are subordinate to the other loans that are made through NYC HPD loan programs,” Henning said. “Loans have been made from the general fund, and now we’re issuing bonds to reimburse the general-fund spending.”
She said the idea to issue social bonds to pay for affordable housing came out of former Comptroller Scott Stringer’s push to use ESG bonds to fund green energy investments.
The Mayor’s Office of Management didn’t support Stringer’s push, but the office was more receptive to Lander’s arguments because the capital projects the social bonds will finance have already been identified, observers said, and the proceeds are to be used strictly for reimbursement.
“We kind of proposed this to our partners in OMB, in the mayor’s office, because we saw that we have accumulated spending on affordable housing in the general fund that hadn’t been financed,” Henning explained. “We said this is the perfect opportunity to finance affordable housing projects.”
The taxable fixed-rate social bonds were underwritten by Citgroup, Morgan Stanley and others.
Henning said the city plans to make its issuance of social bonds an annual program.
“We hope to broaden our investor base, because we do issue a lot of debt,” she said. “This isn’t just a one-off.”
Aaron Elstein contributed reporting to this article.
Source: crainsnewyork.com
