Muni Think

In recent years, the make-whole call has become commonplace for taxable bonds, including municipal Build America Bonds.

News in The Bond Buyer that a few small issuers used reserve funds or bond insurance to pay debt service adds to concerns that a big-name issuer struggling with budget problems may be next. Then it would be news in the general press, which might lead safety-conscious investors to question whether they should own municipal bonds.

The lasting legacy of the taxable bond option program known as Build America Bonds, or BABs, is likely to be measured by the success of the securities in opening up new global credit markets to investment in American infrastructure, a feat that is long overdue.

Over the past few months, even the most confident municipal bond investors have seen fit to revisit the basics of municipal insolvency law. Municipal governments are in a period of once-in-a-lifetime fiscal stress, and negative headlines have stoked fears that even the sturdiest municipal issuers might go the way of Lehman Brothers.

TO THE EDITOR

Last year, Congress created the Build America Bonds program to spur infrastructure investment in our communities and to help thaw the frozen credit markets. We believe this program has been a great success and it should be made permanent, as currently considered by Congress, for the following reasons.

From the private sector's perspective, a viable and profitable new commercial real estate industry and investment asset class has emerged, one which offers considerable business opportunities in construction, property management, and real estate finance.

Twelve states, including California, impose no restrictions on municipalities’ ability to file for Chapter 9 bankruptcy. On the other extreme, there are three states that do not allow local Chapter 9 filings and more than 20 that are silent on the matter, which is generally considered a prohibition.

We decry the decrepit state of our “crumbling” infrastructure, but we have yet to adopt legal rules needed to provide for its ongoing maintenance and repair.

Water and wastewater utilities spend three to four months assembling a bond team of financial experts, reviewing financial ratios and developing the offering statement as part of their due-diligence process prior to issuing millions in debt. However, many have failed to assess the financial risks associated with the replacement costs of underground infrastructure.