WASHINGTON — Overall tax-exempt and taxable municipal bond issuance will increase to more than $502 billion next year from $435 billion this year if the Build America Bond program expires on Dec. 31, according to an annual survey conducted by the Securities Industry and Financial Markets Association.
The survey was conducted between Nov. 15 and Dec. 2 — when an extension of the BAB program seemed achievable. Three-quarters of the survey's 15 respondents assumed BABs would be extended at a 32% subsidy rate, SIFMA said.
But Congress is not expected to extend the BAB program. The House is poised to take up a tax bill passed by the Senate Wednesday that would not extend the BAB program or most other stimulus law-related muni bond tax incentives.
The $502 billion of overall muni debt issuance in 2011 was projected by the handful of survey respondents who assumed no new BABs would be issued. Their estimate is only slightly higher than the $499.5 billion of muni debt issuance estimated by the survey respondents who assumed the BAB program would be extended.
The survey respondents who foresaw the expiration of BABs projected long-term tax-exempt muni bond issuance would increase to $325 billion from $205 billion, SIFMA said. The other respondents estimated long-term tax-exempt muni issuance would increase to $298 billion next year from $286 billion this year.
Issuance of other taxable municipal debt would double in the new year to $50 billion from an estimated $24.9 billion this year without new BABs, according to the survey respondents.
Variable-rate demand obligations are expected to rebound in 2011, those survey respondents said, expecting about $50 billion of them to be issued next year, compared to $20 billion this year. This compares with a 10-year average annual issuance of $53.3 billion for VRDOs, according to the survey.
General-purpose debt is expected to be the largest sector of municipal borrowing this year and next, most respondents said, with a small minority expecting utilities or transportation to be the largest issuing sectors for both years. In previous years, both the general-purpose and education sectors have been the largest issuing sectors, SIFMA said.
The absence of new BABs "won't make a huge difference" in volume next year, predicted Michael Decker, managing director and co-head of SIFMA's municipal division. BABs have not affected overall issuance as BABs are restricted to new-money, new capital projects, he said.
Issuers sold $110.5 billion of BABs for the year through Tuesday and have sold $174.6 billion of BABs since the start of the program, according to Thomson Reuters.
"The value of the program was that it stabilized costs" for issuers, Decker said.
It preserved state and local resources while allowing municipalities to continue capital projects, he said. Without BABs, issuers can expect to see "more volatility and higher yields at the long end" of the interest rate curve. The higher yields mean higher borrowing costs for issuers, he said.
