WASHINGTON — Ongoing cuts to Build America Bond subsidies are "credit negative" for issuers, Moody's Investors Service said in its weekly credit outlook for U.S. public finance last week.
The comments from Moody's come after the Internal Revenue Service announced on Aug. 5 that subsidy payments for BABs and other direct-pay bonds will be reduced by 6.8% in fiscal 2016, which starts Oct. 1. Fiscal 2016 will be the fourth year in a row that the payments will be reduced due to federal spending cuts known as sequestration.
"The reduction is credit negative for municipal issuers, especially ones that issued the most BABs meaning they are most exposed to the subsidy," Moody's said.
However, the credit impact of the reductions to the largest BAB issuers, such as California and New York City, is minimal because the cuts are "small and manageable fractions of their debt service expenditures," the rating agency said.
"Most issuers do not directly rely on the subsidies to pay debt service and the ongoing cuts have not yet materially affected credit quality," Moody's said.
BABs, which were created by the American Recovery and Reinvestment Act, are taxable, direct-pay bonds that state and local governments could issue in 2009 and 2010.
The federal government intended to provide BAB issuers with subsidies equal to 35% of their interest costs in order to encourage issuance of the bonds, Moody's said. More than $180 billion of BABs were issued in 2009 and 2010.
But since March 2013, the subsidy payments to issuers of BABs and other direct-pay bonds have been cut under sequestration. The payments were cut by 8.7% in fiscal 2013, 7.2% in fiscal 2014 and 7.3% in fiscal 2015.
Besides BABs, direct-pay bonds can include recovery zone economic development bonds, qualified school construction bonds, qualified zone academy bonds, new clean renewable energy bonds and qualified energy conservation bonds.
