Nearly a dozen Midwestern issuers have announced they can redeem almost $62 million of their Build America Bonds and other direct-pay bonds because the extraordinary redemption provisions were or will be triggered by sequestration cuts in the subsidy payments they receive from the federal government.
The 10 cities all disclosed their potential redemptions on the Municipal Securities Rulemaking Board's EMMA system in recent days. Their disclosures follow a trend that began in April, just one month after their payments were reduced as part of the $85 billion in across-the-board federal budget cuts mandated by sequestration. As a result, the payments, equal to 35% of interest costs for BABs, that Treasury was to pay issuers was cut by 8.7%.
However, Ohio-based American Municipal Power, Inc., which for $385.84 million of Series 2009C BABs and $300 million of Series 2010 BABs, has costly "make whole optional redemption provisions" in bond documents designed to prevent bondholders from losing any money, disclosed it would make up the cuts rather than call the bonds.
AMP said in an Aug. 13 notice that it "will apply funds set aside as working capital for the Prairie State Energy Campus project, a planned 1,582 megawatt coal-fired power plant, to make up the $634,156.38 deficiency in the subsidy payments received from the Treasury Department."
The issuer said that on Aug. 14 it will transfer funds to make the full the interest payments due on all of its Prairie State project bonds — Series 2008A, 2009A, 2009B, 2009C and Series 2010.
A syndicate led by BMO Capital Markets underwrote the Series 2009C BABs and Bank of America Merrill Lynch and J.P. Morgan co-led an underwriting syndicate for the Series 2010 bonds. Peck, Shaffer & Williams LLP was bond counsel for both sets of BABs, according to bond documents.
The Bond Buyer reported on Friday that the North Carolina Turnpike Authority planned to make up the subsidy payment cuts for more than $586 million of BABs that it issued in 2009 and 2010 with make whole call provisions. Another five issuers disclosed they may redeem a total of $128.44 million of BABs.
In April, the paper reported that at least 12 issuers announced that they were weighing their options to redeem Build America Bonds or other direct-pay bonds. Columbus, Ohio said it might buy back at par as much as $476 million of BABs, which would make it the largest such redemption due to sequestration cuts. In the last four months, Midwestern issuers have dominated activity for calling BABs.
The issuer with the most recently disclosed largest potential direct-pay bond redemption is Independent School District No. 2889 in Lake Park-Audubon, Minn. It said it could redeem $17.35 million of Series 2010A qualified school construction bonds, $1.69 million of Series 2010B qualified zone academy bonds, and $2.07 million of Series 2010C BABs.
The school district said that even though it was disclosing its extraordinary optional redemption provisions had been triggered, its governing body had not taken any actions to redeem the bonds. Ehlers & Associates, Inc. was financial advisor and Knutson, Flynn & Deans was bond counsel for all of the bonds.
Dublin, Ohio disclosed it has the option to call $11.69 million of Series 2009C BABs used to finance transportation and water and sewer improvements. The extraordinary option redemption provision in its bond documents was very broad, allowing for redemption if the full subsidy payment was not made. But the issuer said it has not determined if it will exercise its redemption right. Stifel Nicolaus & Co,. PNC Capital Markets, Robert W. Baird & Co. were underwriters and Squire, Sanders & Dempsey was bond counsel for the BABs.
Oshkosh, in separate event notices, disclosed it could redeem $9.21 million Series 2010A BABs used to finance street and refuse disposal projects as well as $4.16 million of Series 2010B BABs used to finance sidewalk and public land improvements. Ehlers was financial advisor and Chapman and Cutler LLP was bond counsel.
Oconomowoc, Wis. said it can redeem $5.03 million of BABs used to finance street improvements if the IRS follows through with plans to reduce it's Oct. 1 subsidy payment. Hutchinson, Shockey, Erley & Co. was FA.
Platteville, Wis. said it can redeem $4.7 million of BABs used to finance a police station if the IRS follows through with plans to reduce its Sept. 1 subsidy payment. The Hutchinson firm underwrote the BABs and Quarles & Brady LLP was bond counsel.
The village of Prairie du Sac, Wis. disclosed it can redeem $2.62 million of BABs used for street improvements, sewer projects, water projects and library improvements since the IRS cut an Aug. 1 subsidy payment. Ehlers was its FA and Quarles & Brady was bond counsel.
Montello, Wis. said it might redeem $1.58 million of BABs used to finance street improvements since the IRS cut its Aug. 1 subsidy payment. Ehlers was the FA and Quarles & Brady was bond counsel.
The city of Norwood Young America, Minn. said it may elect on Feb. 1, 2014 or thereafter to redeem $1.42 million of recovery zone economic development bonds used to finance a library project because the IRS cut its Aug. 1 subsidy payment. A syndicate led by Robert W. Baird underwrote the bonds. Ehlers was FA and Kennedy & Graven was bond counsel.
Jefferson, Wis. said it can redeem $805,000 of BABs because the IRS cut its Aug. 1 subsidy payment. Ehlers was FA for the transaction.
Nearly $188 billion of BABs were issued since they were created in 2009 as part of the American Recovery and Reinvestment Act. They expired at the end of 2010.