Breaking Ground
John Rucker, Managing Director, Stifel
By Darryl Hicks
10 min read
John Rucker has been an investment banker since 1977 and one of the most sought-after bond underwriters in the country. He co-founded Merchant Capital, LLC, based in Montgomery, AL. In January 2015, Merchant Capital merged with Stifel, Nicolaus & Company, Inc., and today, he manages the firm’s affordable housing business and has an active national practice.
With Rucker at the helm, Stifel has become the leading affordable housing bond underwriter in the country, ranking number one nationally over the last ten years in the number of negotiated multifamily bond issues closed in the country.
Rucker has been a member of Fannie Mae’s Southeast Regional Housing Advisory Council and its National Housing Impact Advisory Council. He currently serves on the Board of Directors of the National Housing & Rehabilitation Association, and the Board of the Federal Home Loan Bank of Atlanta, as chair of housing. Rucker also serves on the board of CAHEC, Raleigh, NC.
Tax Credit Advisor sat down with Rucker to get his insights on today’s affordable housing bond market.
Tax Credit Advisor: At its December meeting, the Federal Reserve raised its benchmark interest rate to the highest level in 15 years, indicating the fight against inflation is not over despite some promising signs lately. Has the Fed’s refusal to stop raising rates made tax-exempt housing bonds any less attractive to developers?
John Rucker: This was an interesting year, to say the least. We closed over 100 four percent bond issues, and they were the hardest deals you’ve ever seen, thanks mainly to the Fed’s actions. Keep in mind, when the Fed raises rates, it’s raising short-term rates. Although interest rates have been significantly higher, it’s the fluctuations that have been maddening. This past Monday (December 19), the 10-Year Treasury was at 3.57 percent. Today (December 23), it is at 3.73 percent. If you modeled a deal in early 2022, it’s going to take nine months to close. If rates increased by 150 basis points from then to now, it’s going to be incredibly hard to close the deal.
TCA: So, any significant increase in rates creates a problematic funding gap?
JR: Yes, it happens frequently and that’s been true the whole year. You’ve got developer fees being deferred and everybody grasping for soft money to plug their deals. It’s like building blocks. There are HOME funds, Community Development Block Grant (CDBG) money, money coming in from municipalities, state tax credits and Affordable Housing Program (AHP) loans from the Federal Home Loan Banks. Everybody is grasping for every dollar to make their deals work when they get those kinds of gaps.
TCA: Funds allocated through the American Rescue Plan (ARPA) are now finding their way into affordable housing deals, so I imagine those have suddenly become critically important too.
JR: Yes, unquestionably. In some states, you’re going to find it’s a little easier to locate funds. Maybe the state agency is a little more accommodating to four percent deals, or there’s a municipality that is anxious to put some money into a property. We’re very active in Louisiana due to allocations of CDBG-DR funds following recent storms. Most recently, we have seen the ARPA funds replace traditional gap loans, such as HOME and local Housing Trust Fund (HTF) initiatives. However, ARPA funds are a bit more elusive as states and local governments create their own deployment strategies. The reallocation rules from the Fed are broad, which gives government agencies more options to fund a variety of programs. Each state will move at its own pace to get these funds appropriated to programs that will enhance a multifamily affordable housing capital stack. Developers should keep an eye on their legislative cycles and processes that will define the use of these funds.
TCA: What other high-level trends are you seeing in the Tax-Exempt Bond market?
JR: We did a lot of Department of Housing & Urban Development deals this past year, which are generally financed with a taxable HUD loan and coupled with cash-collateralized bonds to get the automatic allocation of tax credit equity. That said, we started pricing our short-term bonds at a premium. Short-term buyers are typically bond funds. It didn’t really hurt the transactions all that much because we reinvested at rates that were higher than the yield on our tax-exempt bonds. So that’s been one big thing that happened. The other thing that happened this past year dealt with our longer-term bonds, which are primarily backed by Fannie Mae. Going back to 2020 and 2021, we sold all that paper to Community Reinvestment Act (CRA) bond buyers. But in 2022, our CRA buyers started drying up, which forced us to start selling bonds to alternative long-term buyers, such as insurance companies.
TCA: Are you concerned that the proposed rules to reform CRA could further exacerbate this issue and disincentivize banks to invest in affordable housing bonds?
JR: Yes, we are concerned. Another thing that’s happened is we’re seeing a little bit longer average life on our bond issues. For whatever reason, the bond terms are being pushed out a little bit to accommodate longer construction periods. Also, in 2020 and 2021, if we had a project in Georgia, we might sell to a bond buyer in Texas, Oklahoma or some other place. Now, our CRA issues seem more regional. If we’ve got a transaction in Georgia, we literally have to find a CRA buyer in that geographic area.
TCA: You mentioned insurance companies. Do you see them becoming bigger players in the TEB market?
JR: Yes, I think so. We certainly started seeing it here in the last quarter. We’re fortunate that Stifel sells to a wide variety of bond purchasers, such as credit unions, banks and insurance companies. I do see us tapping into that insurance buyer a little bit more frequently on longer-dated offerings if conditions remain the same in 2023.
TCA: I’d like to get your thoughts on the evolution of housing bonds. Developers historically found nine percent Low Income Housing Tax Credits more appealing compared to the four percent program, but in recent years developers are closing more bond issues than ever. What led to this explosion in TEB issuances?
JR: I think there was a lot of developer fatigue associated with chasing nine percent transactions and incurring pursuit costs, which can add up, only to get to the alter and be turned away. Meaning the developer spent all this money and didn’t get the allocation. It caused a few developers to say, ‘I’m tired of spending money if these deals are not being awarded.’ I think there’s been a trend this past year for more developers to look at bigger cities and larger transactions. You’re going to find that a four percent bond lends itself more to a bigger deal in a bigger market.
TCA: What exactly does a bond underwriter do? At what stage are you brought into an affordable housing transaction?
JR: A bond underwriter comes in at various stages a lot of times. A developer can be so focused on the equity side, on the building permit or on tying up the land that the bond underwriter arrives late to a deal. Some decisions may have been made late, which can make the deal harder to close than if we had come in earlier. The ideal place to be brought in is near the beginning, becoming aware of the deal, providing structuring analysis and then leaving the developer and the lender to work through their underwriting for several months. Once they get to a point where they’re getting a little closer to turning us loose to sell the bonds, that’s when we get involved. We consider ourselves to be the quarterback of all the parties. Once the deal starts to come together, at the end of the day, we’re quarterbacking the team and selling the bonds to close the transaction.
TCA: There are different types of bonds that support affordable housing development, whether it’s four percent bonds, 501(c)3 bonds, etc. Are there specific TEB programs that you recommend to your developer clients based on the circumstances of the deal?
JR: My team is scattered from one coast to the other and 90 percent of the deals that we worked on this year involved four percent tax credit private-activity bonds. That’s our bread and butter. This past year, we also closed a sizable pool of 501(c)3 bonds, and back in 2021 maybe a few more. Personally, I think 501(c)3 bonds in a rising interest rate environment become tougher and tougher. You don’t have the ability to plug those funding gaps that we talked about earlier with soft money when you’re doing a 501(c)3 bond deal. The bond buyers that buy that paper will desert that market much faster than let’s say a four percent tax credit transaction. I’ve seen a few other interesting deals, for instance, this past week we sold a $17 million dollar transaction in Breckenridge, CO that was a Certificate of Participation and the issuer was the town of Breckenridge. That’s a one-off, different type of bond. We also did several workforce housing bond issues for some of the Colorado ski resorts this past year that were not tax credit deals but taxable bonds.
TCA: It has been six years since your company, Merchant Capital, merged with Stifel. What led to your decision to become part of Stifel? Were there any lessons learned during the transition that you can share?
JR: My partners at Merchant Capital, there were four of us essentially, didn’t want to be a part of a large bank or a Wall Street firm. Stifel was perfect for us because it was neither. The biggest thing I noticed these past six years has been Stifel’s brand recognition. At Merchant Capital, it could be challenging to enter a new market in the Northeast or Pacific Northwest and tell someone who you were. At Stifel, it’s a totally different situation. If you consider our wealth management offices, which are in almost every major city, and our public finance presence from one end of the country to the other, people know who we are. It really has paid off, and we’ve been extremely successful in expanding our footprint and market share throughout the country under the Stifel brand.
TCA: Where do you see the TEB market in six months? In 12 months?
JR: The Fed will certainly continue to increase rates, but not anywhere close to what they did this past year. Perhaps we’ll see some of this volatility leave us. We’re going to see some higher coupons, but I think we may see a little more level of demand. We’ve got a pipeline developing for next year (2023). We’re waiting for Fannie Mae and HUD to put together their pipelines and products and pricing to meet the production levels that we’ll see next year. I just want to see some of this volatility settle down, and I think we might.
