BAB Payment Cuts a Focus for Virginia Issuers

Build America Bond subsidy payment reduced by sequestration took center stage as several prominent Virginia issuers came together to discuss their bond financings with investors Friday.

Richmond-based investment firm Davenport & Company organized the first annual Virginia Investor Conference to bring together issuers and investors in a non-transaction setting, said Jamie Traudt, the company's senior vice president. Traudt said he hoped that by bringing together several large issuers, it would create a draw for investors and allow them the chance to have top issuer officials answer their questions.

"We wanted to create an opportunity," Traudt said.

Conference attendees used that chance to pepper the issuers with questions about the federal sequestration cuts that kicked in at the beginning of the month, including the effect of BAB subsidy payments being reduced. Although none of the issuers thought the potential 8.7% reduction of those subsidy payments would be a significant blow, they did express disappointment and said they are exploring the possible ramifications.

"We have Build America Bonds," Metropolitan Washington Airports Authority chief financial officer Andy Rountree said when asked about sequestration. "We're concerned about cuts as they would impact the subsidies of Build America Bonds."

Rountree said he estimates that MWAA, which operates Reagan National Airport and Dulles International Airport in Virginia as well as the Dulles Toll Road and issued $550 million of BABs, would take a $600,000 hit in subsidy payments each year under the sequester.

"That's not a huge deal in the grand scheme of our debt service," Rountree said. "We have planned and budgeted. But we wish that we wouldn't have to do that and ultimately that's going to fall to the toll road payers."

That road has already created controversy by using tolls to back the debt financing of a roughly $5 billion extension of the Washington Metrotrail system to the Dulles airport. Opponents of the financing plan have argued that using tolls to fund the train amounts to an unconstitutional tax. Two North Virginians have filed a suit against MWAA arguing that point, but two federal courts have so far declined to intervene.

Suzanne Long, executive director of the Virginia Resources Authority, puts together pooled financing deals for groups of smaller issuers in the commonwealth. Long said the VRA has been communicating with those local borrowers to let them know about the impact of the sequester, but that it was understood from the beginning that the debt ultimately belonged to them. She added that those smaller issuers will be cushioned because the nature of the pool deals mean no one borrower will take a huge hit.

"We will see an impact there, Long said. "The dollar amounts are not that large."

Manju Ganeriwala, Virginia's Treasurer, said the triple-A rated commonwealth's robust economy and its highly-educated workforce would keep it going strong despite the slow national economic recovery and unpredictable federal policies that leave her feeling "bounced around like a beach ball."

"Uncertainty has become the new norm for us," she told conference attendees.

Ganeriwala added that Virginia has the benefit of not relying on short-term borrowing for operational expenses the way some states do, using cash reserves instead. Strategies for dealing with continued federal uncertainty include shoring up those reserves as well as diversifying the economy by encouraging more varied industry to set up shop in Virginia, she said. The continuing resolution that Congress approved Thursday and President Obama is expected to sign before Wednesday to keep the U.S. government funded through the rest of fiscal year 2013, she said, also will give the Department of Defense more flexibility in implementing cuts, a boon to the thousands of DOD workers in Virginia.

"That flexibility will help Virginia," said Ganeriwala.

Davenport & Company is hoping to repeat the conference next year, with different issuers and presenters, Traudt said.

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