LOS ANGELES — The municipal bond provisions of the federal stimulus package, particularly Build America Bonds, offer intriguing options for issuers, though some questions remain about implementation, panelists said at a Bond Buyer conference here yesterday.
There has been a quick takeoff for the direct-pay BAB program, in which the federal government provides a 35% subsidy for interest paid on taxable bonds issued for many programs eligible for tax-exempt financings.
“I suspect the Build America Bonds program, though right now it’s for 2009 and 2010, we may be seeing more of this in the future,” said Carol Lew, partner at Stradling Yocca Carlson & Rauth.
The first round of direct-pay BAB issues has set some benchmarks in rates and structure, panelists said. One trend among the big issues has been for an immediate secondary market tightening in the days after the pricing.
Kathleen Brown, managing director of Goldman, Sachs & Co., which served as underwriter on a few of the earliest BAB issues, including California’s recent transaction, said that such tightening is simply the mark of a successful taxable bond deal.
“That’s really a straw man,” she said of any controversy over such tightening. “This aftermarket tightening is to be expected.”
Michael Kremer, senior vice president at First Southwest Co., framed it differently. “Coming to market early as the market is sorting itself out, there is going to be a premium,” he said.
He quantified the penalty for four of the early, large issuers of BABs: the University of Minnesota, the University of Virginia, the New Jersey Turnpike Authority, and California. Three days after pricing, yields on those issues had tightened between 24 basis points for California to more than 42 basis points for the Jersey Turnpike.
“Call it a first adopter penalty,” he said.
Typical BAB deals have come with typical taxable structures, including “make- whole” call provisions, as opposed to the typical 10-year par calls in tax-exempt bonds. That makes fair comparisons difficult, Kremer said.
“If anyone out there can actually give me an English definition of a make-whole call, I’d be glad to hear it,” said Peter Taylor, CFO of the University of California, who expects to issue BABs in 2010.
First Southwest estimated the cost of the make-whole call provisions on the Virginia, Turnpike and California deals — on the sale date, the call price would have been between 135% and 156.4%; if yields are the same at the 10-year mark, the call price would range from 128% to 143%.
Kremer noted other questions that will arise as the BAB program plays out with subsidies received from Washington over the decades, citing one question. “For revenue bond issues, how does the subsidy affect the flow of pledge revenues?” he said. “What is the impact of the subsidy on rate covenants, and pledged revenues?”
Money issuers get from the federal government as BAB subsidies does not have to be used for any particular purpose, Lew said, prompting an audience member to ask if they can be securitized. Lew responded that there are no restrictions in the law.
The directly subsidized BABs have been adopted faster than BABs that offer tax credits instead of a subsidy, Lew said. That seems largely to be because the market for such tax-credit deals is still largely undeveloped, she said.
But tax-credit BABs can be used for more purposes than subsidy bonds, which are limited to new-money capital projects, she said. The law permits tax-credit BABs to be used for working capital, for example.
“Theoretically, you can issue a Build America [tax and revenue anticipation note] as a tax-credit bond, if a market develops for it,” Lew said.
She added that federal tax enforcement is one of the questions that remain about BAB implementation.
