Home Loan Bank Weighs Tax-Exempt Deal

The Federal Home Loan Bank of San Francisco is considering selling an unusual and especially large letter of credit - $200 million - for a tax-exempt housing issue.

The deal is proposed for early 1992. The bank has issued only three other similar letters recently. The largest was for a $10.6 million offering Los Angeles sold in September.

Implied federal backing for a municipal-type security, once rare, has been stimulated by the recent entry of commercial banks into the Federal Home Loan Bank System.

"One large customer has asked us for an availability" of about $200 million for tax-exempt housing credit, said Gary L. Curley, senior vice president of financial services at the San Francisco bank. "There has been some upturn in business recently."

In the emerging category of tax-exempts with implied federal backing, two other government-sponsored enterprises - the College Construction Loan Insurance Association and the Student Loan Marketing Association - have guaranteed municipal bonds.

Trend Foreseen

With commercial bank membership in the Home Loan system increasing, "you probably will see more of these deals in the future," said Karen Hill, senior investment officer at Philadelphia-based PNC Financial Corp.

The San Francisco Home Loan Bank has gained 21 commercial banks since the 1989 thrift-reform law allowed membership to institutions other than thrifts.

Letters of credit are widely used by the Home Loan banks, but until this year activity was almost exclusively in the taxable commercial paper market. Ms. Hill said the 12 Home Loan banks issued letters of credit for $3.5 billion to $4 billion a year for the past four years.

Analysts noted that tax-exempts guaranteed by the banks trade very strongly, in some cases matching Treasury prices.

As a result, an unusual security is evolving: a triple-A issue that trades on a par with debt from "natural" triple-A municipalities though underlying credit quality could be very low.

The pricing of the Los Angeles issue "was in line with any other natural triple-A and certainly better than the other insurance companies," said Will Browne, municipal credit analyst with PNC Financial.

"We feel good about the [government-sponsored enterprise] itself, too. A lot of strength comes from the implied backing, but at the same time we feel there are enough resources there to pay" without tapping the federal government.

"Our bonds have been trading very tight to Treasuries," said Mr. Curley of the San Francisco Home Loan Bank. "But that's not surprising to us. Quite honestly, we don't have any interest in following these things."

"Generally speaking, we are very highly regarded by the marketplace and by the rating agencies as the only [enterprise] that could get a triple-A on its financial condition," he added. "And our prices are very attractive."

Banks Reluctant

Mr. Curley said the bank charges a 15-basis-point fee regardless of credit quality, size, or sophistication.

Other letter-of-credit banks place enormous emphasis on credit quality, charging more than 50 basis points for weak A-rated credits, and, in fact, steer clear of housing deals altogether.

Lisa Pent, an assistant vice president at Fuji Bank Ltd., the No. 1 letter-of-credit provider, said banks are shying away from the tax-exempt housing market because of its risks.

"We're not worried about their taking business away from us," Ms. Pent said. "There's definitely a need" to do multifamily housing deals. "If they figured out a way, great."

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