The constantly evolving world of securitization gave birth to yet another new asset class last week, as Dallas-based AMRESCO Capital tapped the private placement market with a $100 million deal backed by construction loans, sources said.
Market players said the long anticipated debut deal will spur more issuance in the sector, as this type of funding strategy provides increased flexibility for home builders, who have long sought a way to securitize construction loans.
"After this landmark securitization, quite likely a number of companies seeking long-term financing for construction loans will chose this new financing vehicle," said one Wall Street pro.
Agented by Banc of America Securities, the deal is backed by both acquisition loans and development loans, which are made to subdivision developers so they can acquire land and put in place the permits, the streets, the water and sewer facilities, etc. The securitization also contains "vertical" loans, which finance the construction of the actual homes from digging the foundation to putting on the roof.
Sources said the deal was expected to include three classes, with ratings ranging from triple-A to single-A from Duff & Phelps Credit Rating Co.
Besides being the first of its kind, the transaction is also significant because it proves construction loans can be securitized without using the financial asset securitization investment trust (Fasit), a vehicle that was passed into law in 1996-in part to facilitate construction loan deals-but is currently awaiting long-overdue implementation guidelines.
One stumbling block to securitizing construction loans has long been the revolving nature of the financing, a characteristic that has drawn comparisons to credit-card debt. (A pool of loans would be revolving in the sense that the originator's cash flows change periodically as buildings are constructed and sold; thus, a revolving structure must be set up to account for those fluctuations.)
But Henry Hayssen, a group vice president at Duff & Phelps, said that dealer floor-plan securitizations offer a closer parallel. "In a floor-plan securitization, autos flow onto and then out of a certain number of dealerships; in a construction-loan securitization, houses are being built and then sold by a certain number of developers," he explained.
While the structure of this deal is that of an asset-backed security, its risk component is real estate.
However, unlike other types of residential real-estate securitizations, construction loans are not expected to entail prepayment risk. - ES
