Issuers Begin Calling BABs Due to Sequestration

At least three issuers in the past few weeks have announced their intent to redeem Build America Bonds at par plus accrued interest because they believe the cuts in their federal subsidy payments under sequestration has triggered the extraordinary redemption provisions in their bond documents.

The Central Texas Regional Mobility Authority, an independent government agency created in 2002 in Austin  to improve transportation in Williamson and Travis counties, announced in early March it would redeem $45 million of BABs on June 5.

“This would be a significant savings compared to the interest rates that we have on the BABs even with the subsidy payment,” said Bill Chapman, chief financial officer with the authority. Chapman could not say how much the redemption would save the city. The city had issued the subordinate lien revenue BABs in March 2010. Chapman said their BAB subsidy payment was reduced by 8.7% due to sequestration.

The bond documents said an “extraordinary event” would occur and trigger a call if there was a change to Sections 54AA or 6431 of the federal tax code “or any other law or regulation, pursuant to which the federal subsidy payment is reduced or eliminated.”

On March 1, approximately $85 billion of federal budget cuts went into effect, meaning all subsidy payments for direct-pay municipal bonds, including BABs, to be paid between that date and Sept. 30 would be reduced.

On April 2, Horicon, Wis. announced on April 2 their intent to redeem $2.45 million of BABs that were issued in April 2010.

“The reason that we are looking to do this refunding is because the federal government reduced our subsidy payment,” said Kristen Jacobson, city clerk/treasurer. “Out of the clear blue they decided to reduce our payment only a few years into our 20-year bond.”

The city was notified by the Internal Revenue Service on March 8 that their BAB subsidy payment due on April 1 in the interest amount of $19,455.62 was reduced by 8.7% to $17,762.98 due to sequestration, according to an event notice the city filed on the Municipal Securities Rulemaking Board’s EMMA system. “The city will use other funds to pay the interest due on April 1, 2013 in full and no interest payment delinquency is being reported now,” the notice said.

Horicon has a conference call with Moody’s Investors Service this week to discuss specifics of such a refunding. The city is soliciting bids at this point, Jacobson said.

“The [the federal government] has only made a few payments to us and already have reduced it,” Jacobson said. “With interest rates going the way they are, it makes financial sense for us to do this. It’s not a huge savings, but any savings we can find for taxpayers, we will find it.”

The bond documents said an extraordinary event would occur if either Section 54AA or 6431 of the code was amended, repealed or modified in a manner reducing or eliminating the subsidy payment or the Treasury “fails to make a cash subsidy payment to which the city is entitled and such failure is not the cause by any action or inaction by the city.”

Monona, Wis. announced on April 9 that they would redeem $7.6 million of BABs due to the 8.7% subsidy payments reduction from sequestration. When the city redeems the bonds, they will pay 100% of the principal amount plus accrued interest, according to an event notice filed on EMMA. Its bond documents contained similar language to those of Horicon.

But Barclays Municipal Research analyst Tom Weyl stressed that these appear to be “one-off” situations. “The combination of strong risk redemption language and economically viable refinancing due to par call price may occur, but not for the vast majority of BAB debt outstanding based on par outstanding,” Weyl said.

Weyl and his team have been closely monitoring extraordinary redemption provision language triggers that would allow an issuer to call their BABs as a result of the budget cuts. There are 26 CUSIPs that contain strong risk language on the Barclays BAB index, where issuers could call their bonds, Weyl said.

“It’s hard to draw a conclusion so far,” Weyl said. “It’s fairly early yet.”

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. As part of his fiscal 2014 budget President Obama proposed taxable, direct-pay America Fast Forward bonds, a program where the Treasury Department would pay issuers 28% of their interest costs for general purpose bonds and a 50% subsidy rate for public schools and university projects. AFF bonds could be used for projects that otherwise would be funded by tax-exempt private activity bonds, as well as an expanded list of projects that were funded by BABs.



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