FORT LAUDERDALE, Fla. - With sequestration looming, and the tax-exempt bond threatened by federal tax reform, some market experts argue that alternative municipal financing can be achieved with taxable bonds.
There is a "huge" appetite for taxable muni bonds that large issuers should consider as an efficient source of capital financing, Breckenridge Capital Advisors president Peter Coffin said at the Fifth National Municipal Bond Summit here Monday.
"I'm a huge believer in tax-exempt primarily for small issuers," Coffin said, adding that it allows them to access capital markets efficiently and reduces borrowing costs for them. "For large municipal issuers, I think the story is a little different."
Coffin said there is a push now for sustainable investing, and shifting some capital supply to the taxable market would push interest rates lower for issuers that prefer to continue financing with tax-exempt bonds.
Though the Obama administration recently proposed the taxable, direct-pay America Fast Forward program to finance infrastructure, its success is questionable because of looming sequestration cuts that are expected to go into effect Friday, as well as questions about the reliability of the subsidy as policies about federal tax reform move forward, he said.
"It's important that this industry talk about alternatives that make sense, and not be disruptive to our market," Coffin said. "I would argue that being able shift some supply to taxables put us in better situation."
Choices in municipal financing have been limited with most of the market composed of fixed-rate bonds, but the expired taxable Build America Bond program worked well for certain investors, said James Pass, municipal portfolio managing director for Guggenheim Partners Investment Management.
"We should use this opportunity to explore other [financing] options that may be more efficient for issuers in the muni market," he said, referring to ongoing federal policy discussions about tax reform. "I think investors and issuers want more options."
When the market is inefficient, he said, issuers will seek the lowest cost of capital financing.
What still must be determined is how the subsidy on taxable bonds will be transferred from the federal government to the individual investor or directly to the issuer.
"It depends on what happens in the next couple of days," he said, referring to Friday's deadline in which sequestration could take effect.
Some market participants at the conference believed that Congress will allow sequestration cuts to occur, and that situation could last as long as three weeks before a compromise is hammered out.
The attack on tax-exempt financing is the most serious since the 1980s, Municipal Market Advisors legislative coordinator Matt Posner said. However, "we believe the exemption is paramount to financing this country's infrastructure."
Though limited financing programs such as the America Fast Forward bond plan will not meet all the country's infrastructure needs, alternative financing structures may need to be considered at lower subsidy rates, he said.
"The bottom line for us is that if this industry continues to say tax-exempt or bust, we stand to lose a lot more than what we ever thought was on the table," Posner said.
Even though new financing alternatives may be on the horizon, conference participants in another session Monday said protecting municipal credit quality will remain important.
Dick Sigal, a partner at McKenna Long & Aldridge, said state involvement is one of the keys to assuring that local governments maintain good credit. States are in a position to intervene and assist if distress arises.
"There's no question states must be involved," Sigal said. "The state is the senior [partner] of the whole structure, and every municipality is the subordinate. If there's no market access [for local government], the next in line would be the state."
