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N.Y. County Group Mulls Pooled BABs

Counties in New York could band together to sell taxable Build America Bonds in a pooled financing, according to an organization that represents counties in the state.

"The Build America Bonds and direct payment subsidy is something that is gaining increasing interest, and we're looking at perhaps structuring a financing mechanism to provide that as an option," said Stephen Acquario, executive director of the New York State Association of Counties. "As the counties continue to contact us about this, there may an opportunity to do a pooled transaction to help move it along."

Under the American Recovery and Reinvestment Act, the Build America Bond program allows tax-exempt issuers to sell taxable bonds and elect to either pass on to investors a federal 35% tax credit or to take that subsidy themselves as a cash payment. BABs are just beginning to hit the market and last week the U.S. Treasury published guidance to issuers on the new financing option, which expires at the end of next year.

Acquario said the pooled financing discussions are preliminary.

"We're looking into it," he said. "We're a long way off. It's quite complicated."

NYSAC, an organization that has represented the state's 62 counties to the state and federal governments since 1925, has been involved with pooled financings before. The organization put together a pooled tobacco deal in 2000 under which the New York Counties Tobacco Trust I sold $227.1 million of bonds, and then again in 2001 when the New York Counties Tobacco Trust II sold $209 million of bonds.

In 1998, a master settlement agreement between most state attorneys general and the four largest tobacco manufacturers resolved past, present, and future smoking-related litigation with the manufacturers agreeing to make future payments to the states. In New York, the allocation was divided among the state and individual counties. In the 2000 deal, 17 counties formed individual tobacco asset securitization corporations that pledged and assigned their tobacco settlement payments to the trust.

Pooled financings can lower issuance costs and could help the counties create the kind of larger deals that the taxable debt market tends to favor.

Gary Bornholdt, counsel at Nixon Peabody LLP, said that BABs are intended to operate the same way that tax-exempt government bonds do.

"You can pool tax-exempt bonds generally, so there's no prohibition on pooling these Build America Bonds," Bornholdt said.

The use of the BABs' direct subsidy option in a pool could require further federal guidance if individual borrowers wanted the payment to go directly to them rather than to pass through the issuer.

"In the case of the direct-pay version, the direct pay is going to go to the issuer at the pool level, so you might need some additional guidance with respect to how the payment goes to all those conduit borrowers in the pool," Bornholdte said.

He said that arrangements regarding the direct pay could presumably be made through the different members of the pool in the absence of further guidance from the Treasury or Internal Revenue Service.

One banker, who asked not to be identified, wondered whether a pooled financing would work in this case since unlike the tobacco deal - which relied on a revenue stream that was independent of the individual counties - each county in a BAB pool would have its separate credit rating.

"Build America Bonds would ultimately have the credit of the issuer. Yes, there's some kind of subsidy that's being provided by the federal government of 35%, but how are they going to be able to pool these transactions together when ... the ultimate payer is the issuer?" the banker said. "You don't have bond insurers anymore that are willing to homogenize the credit."

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