Eminent domain plan may force premium on Richmond, Calif., bonds -city report

SAN FRANCISCO Mon Nov 25, 2013 5:44pm EST

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SAN FRANCISCO Nov 25 (Reuters) - Richmond, California, may need to offer higher yields to lure hesitant investors after a bond sale failed three months ago, the city's finance director said, citing its plan to use eminent domain to seize mortgages with negative equity.

Finance Director James Goins said in a Nov. 19 report that a yield premium, estimated at half a percentage point of additional interest, would reduce savings on Richmond's planned $34 million refunding deal by just over $1 million over the life of the debt. It would provide the city with $1.2 million in projected savings from the sale.

Richmond tried to sell the debt in August, but underwriter RBC Capital Markets found no buyers after the city discussed its eminent domain plan in its preliminary offer statement.

Richmond's city council endorsed the mortgage-seizure plan in September, making the city the first in the nation to embrace using eminent domain to take over so-called underwater home loans.

A mortgage is under water when its unpaid balance is greater than its property's market value. Eminent domain allows governments to seize private property for a public purpose.

Richmond has proposed buying more than 600 delinquent and performing mortgages at deep discount, pegged to the properties' current appraised prices, to refinance them and reduce their principal.

If its offers are rejected, Richmond could invoke eminent domain to acquire the mortgages. Critics say that if Richmond goes through with its plan to partner with investor group Mortgage Resolution Partners to acquire the loans that way, it could set a threatening precedent for the market for private-label mortgage-backed securities.

Supporters say the plan would make mortgages more affordable, avert foreclosures and alleviate blight in Richmond, one of the San Francisco Bay area's poorest cities.

The plan, which has spawned lawsuits, has probably triggered "headline risk" among investors for Richmond's refunding bonds in the $3.7 trillion U.S. municipal debt market, which the city's new underwriter aims to address, according Goins' report.

Stifel, Nicolaus & Company Inc is the deal's underwriter and RBC Capital Markets is its structuring agent.

Stifel Managing Director James Cervantes said on Monday the negotiated deal would refund bonds for the successor agency to Richmond's redevelopment agency, and that the debt is backed by tax-increment property tax revenue from properties that have minimal exposure to the eminent domain plan.

Commercial parcels account for two-thirds of the value of the properties included in merged project areas of the successor agency, and less than 100 of the 4,500 residential properties in those areas would be affected by Richmond's eminent domain plan, Cervantes said.

"You just need to get investors to focus on the bonds," he said, adding that Richmond's deal may come to market next month or in January.

Comparable refunding bonds issued by the successor agency to Glendale, California's redevelopment agency and sold earlier this month had a 4 percent coupon on their five-year maturity.

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