Municipal Mortgage & Equity grants security interest to avoid collateral posting for margin calls

By Caroline Salls

Pittsburgh, March 12 - Municipal Mortgage & Equity, LLC and wholly owned subsidiary MuniMae TEI Holdings, LLC granted Merrill Lynch Capital Services, Inc. a security interest in MuniMae TE Bond Subsidiary, LLC in order to a avoid the need to post additional cash collateral to meet future margin calls, according to an 8-K filed with the Securities and Exchange Commission.

In addition to entering into the Merrill Lynch agreements, Municipal Mortgage said it has begun to sell its state housing agency bonds and unwind hedges to preserve liquidity and reduce leverage even though the company expects to incur losses in connection with the liquidation of its positions.

Between March 1 and March 11, Municipal Mortgage sold $148 million of bonds and terminated $50 million of hedge positions at a total loss of roughly $20 million.

According to a company news release, MuniMae TE Bond Subsidiary holds the company's housing bonds and interests in housing bonds originated by Municipal Mortgage.

The company said the margin calls are related to securitizations of tax-exempt bonds, hedges acquired in connection with those tax-exempt bonds and financings of and hedges associated with other real estate-related loans and investments.

Under the Merrill Lynch agreements, Municipal Mortgage and its subsidiaries will receive credit against margin requirements, without the need to post additional cash, equal to 50% of the value of the common shares of TE Bond Subsidiary, subject to a maximum credit of $100 million and a requirement that the value of the shares be at least $50 million.

In addition, Municipal Mortgage is entitled to the benefit of this margin credit on all of its borrowing or derivative arrangements with Merrill Lynch related to tax-exempt bonds, other than the obligations of TE Bond Subsidiary.

Municipal Mortgage also has the right at any time to unwind the arrangement by posting cash or other collateral acceptable to Merrill Lynch.

According to the 8-K, a recent rise in interest rates on tax-exempt bonds significantly reduced the value of interests in state housing agency tax-exempt bonds held by Municipal Mortgage, which led to margin calls to support borrowings secured by those bonds.

At the same time, Municipal Mortgage was required to post margin collateral for derivatives that had been acquired to hedge against interest rate exposure on the tax-exempt bonds that were losing rather than gaining value because of market abnormalities.

"As the yields on municipal bonds hit near historic high levels at the end of February, the value of municipal bonds rapidly declined even though nothing about the credit quality of the bonds themselves had changed," Municipal Mortgage chief executive officer Michael L. Falcone said in the release.

"This decline in value triggered margin calls throughout the marketplace, including for MuniMae, which borrows from Merrill Lynch against the value of its tax-exempt bond holdings.

"MuniMae has met all margin calls to date, including $39 million in 2008. With this agreement we have a way to meet our future margin calls without further impairing our liquidity even if there is further movement in the yields and values of municipal bonds."

On March 6, Municipal Mortgage said it had $55 million of cash margin collateral posted with Merrill Lynch, of which $39 million had been posted since Jan. 1. The Merrill agreements stopped the company's need to post additional cash collateral, unless the available margin credit is exceeded.

Municipal Mortgage & Equity is a Baltimore-based provider of debt and equity financing to developers of multifamily and commercial properties.

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