California priced $446 million in veterans' general obligation bonds last week in a combined refunding/new money sale.
New money proceeds will fund more home loans to veterans.
"Our demand is pretty high," said California Department of Veterans Affairs Deputy Secretary Theresa Gunn. "We have a pretty strong growth pattern and expect to do more loans this year."
CalVet's loan volume has grown from $8.7 million in fiscal 2012-13, to $70 million in fiscal 2013-14 and $107 million in fiscal 2014-15, Gunn said.
Demand has grown as the economy has improved and since the federal government changed a requirement that limited loans to veterans who fought in Vietnam and prior wars, Gunn said. A new federal requirement that took effect in 2008 enables service members who have been in the military over the past 25 years or are active military to obtain a home or farm loan, Gunn said.
The bonds were sold in three series; a $164 million Series CM, subject to the alternative minimum tax, and a $128 million Series CL and $152 million Series CK, both tax exempt.
The $128 million new money tranche will help CalVet close more loans, said Eric Tiche, CalVet's assistant deputy for bond finance and investment. They are hoping to save $20 million on the $315 million refunding.
Deputy Treasurer Tim Schaefer called the bonds double-barreled, because they are backed by CalVet revenue and the state's GO pledge.
The bonds should achieve interest rates similar to California GOs, Schaefer said.
When CalVet sold $110 million in GOs in September 2014 they traded like triple-A bonds, Tiche said.
The CalVet pledge gives the debt higher ratings than California GO bonds.
CalVet's bonds received ratings of Aa2, AA and AA-minus ahead of the sale from Moody's Investors Service, Standard & Poor's, and Fitch Ratings, respectively. All three assigned a stable outlook.
S&P revised its outlook to stable from positive reflecting "a decline in the Veterans' farm and home purchase program's net position due to the [Governmental Accounting Standards Board Statement No. 68] implementation in addition to a deficiency of revenues over expenses of approximately $500,000 in fiscal year 2015," said Standard & Poor's credit analyst Aulii Limtiaco.
The GASB rule change altered how pension liabilities are reported on financial statements for fiscal years after June 15, 2014. CalVet's 1943 Fund, which it uses to issue home loans, decreased by $13.8 million to $98.7 million, primarily as a result of a $14.6 million restatement due to GASB 68 taking effect.
CalVet officials are planning to sell bonds as frequently as twice a year if market conditions allow.
CalVet is able to warehouse the loans for 18 months and then resell them to Fannie Mae, so they typically use liquidity to offer new loans, Tiche said. They currently have $86 million warehoused, but their production is improving, so they need more closings, he said.
CalVet sold $110 million in new money bonds in September 2014 and did a refunding in 2012.
"We would like to go to market twice a year, but depending on market conditions," Tiche said. "Right now, bond rates are very attractive. We already have two-thirds of the new money loaned out, so we are well-positioned."
The treasurer's office worked to include Service Disabled Veteran Business Enterprises as underwriters on the deal.
"We started with the idea that it was a veterans' bond issue and we wanted to make sure to give all veteran-owned firms a shot at this," Schaefer said.
Since many of those firms are small — and the offering is large at $466 million — the treasurer's office wanted a bulge bracket firm in the lead position, so it selected Bank of America Merrill Lynch as joint senior manager.
"We didn't want to saddle a smaller firm with too much risk," Schaefer said.
BAML also passed the litmus test of having a published policy of hiring veterans.
The joint senior managers on the 11-member syndicate are BAML, which employs more than 10,000 veterans, guards and reservists, and Academy Securities, a Service Disabled Veteran Business Enterprise. Co-joint senior managers Drexel Hamilton and Mischler Financial Group, are also Service Disabled Veteran Business Enterprises.
Rounding out the finance team are Polsinelli as bond counsel and Montague DeRose and Associates as financial advisor.