After plunging during the financial crisis, the issuance of municipal bonds subject to the alternative minimum tax is slowly rebounding, with airports leading the way.
Issuance of long-term bonds subject to the AMT declined to $24.1 billion in 2008 from a recent peak of $37.8 billion in 2007.
To help stimulate the market during the economic crisis, the American Recovery and Reinvestment Act provided a temporary “holiday” for muni bonds that would normally have been subject to the AMT. As a result, bonds issued between Feb. 17, 2009, when the act was signed into law by President Obama, and the end of 2010, were tax-free and the issuance of new AMT bonds slowed to a trickle.
AMT issuance plunged to $1.6 billion in 2009, most of which was used to refinance debt. Somewhere between 72% and 83% of the total was refunding debt because tax law typically prohibits tax-exempt bonds from being used to refund AMT bonds.
Most municipal securities that are defined as private activity bonds are subject to the alternative minimum tax. PABs generally are munis where 10% or more of the proceeds are used by private parties and more than 10% of the debt service is paid or secured by private parties. Many bonds issued for airports, housing and transportation are considered PABs subject to the AMT, and investors demand a higher rate of interest in order to compensate for being subjected to AMT risk.
AMT bond issuance crawled back to $5.8 billion in 2010, jumped to $8.1 billion in 2011 and is projected to hit about $12 billion for all of 2012.
While this year’s total is far above the level for 2009, it is still far below 2007. That reflects the fact that most sectors subject to the AMT have not rebounded.
For example, in 2007 housing bonds subject to the alternative minimum tax constituted the largest AMT issuance sector at $21.6 billion. So far this year, housing is the second largest AMT sector but amounts to just $776 million out of a total of $7.9 billion.
The volume of AMT housing bonds crashed along with the housing market, said Justin Hoogendoorn, managing director of BMO Capital Markets. The sector has remained depressed as the housing market continues to struggle.
The depression in housing bond issuance may reflect the fact that people are turning now more to banks than to state housing authorities for loans, according to Howard Cure, director of municipal research at Evercore.
Unlike housing, transportation, which includes airports, has been a bright spot for AMT issuance. The AMT transportation sector slid to $428 million in 2009 from $6.1 billion in 2007. It grew to $2.7 billion in 2010, to $5.6 billion in 2011 and to a projected $8.8 billion in the current year. The transportation is the only sector of AMT bonds since 2009 to recover to levels similar to those of 2007.
So far in 2012 airports have sold 76% of all transportation AMT bonds. Airport AMT issuance has taken a simple path since 2009. While it was just $409 million in 2009, it has risen steadily to a projected $6.7 billion in the current year. It was $7.5 billion in its most recent peak in 2008. Experts offered several explanations.
Airports are selling bonds to finance a variety of projects, most of them expansions, said John Hallacy, head of muni research at Bank of America Merrill Lynch. He expects airports to sell more AMT debt in the future.
Airports have been urged to issue more debt because investors are clamoring for yield and have a greater appetite for risk, said BMO’s Hoogendoorn. In 2009 just 1.2% of transportation AMT debt was new financing. Through Sept. 3 of this year, about 41% of that debt was new money.
Airports are increasingly turning to bonds as a means of financing, said Annie Russo, senior director of government and political affairs at Airports Council International-North America.
Bonds subject to the AMT usually offer about 55 basis points, or better than half a percentage point. That’s more in yield than totally tax-free airport bonds for 30-year maturities, noted Michael Phemister, vice president of treasury management at Dallas-Fort Worth International Airport. But with rates so low in general, airports are inclined to sell debt now, he said.
Airports generally use AMT bonds to build or improve terminals, he added. DFW issued two of the six biggest alternative-minimum tax bond issues so far this year, and is improving four older terminals with the proceeds. It plans to issue $2.5 billion of new-money AMT debt from 2010 to the end of 2017, Phemister said.
Total airport issuance of all types of munis jumped to $18.7 billion in 2010 from $11.1 billion in 2008. Like other sectors of the market, airport issuance fell in 2011, to $8.6 billion, though it has recovered to a projected $11 billion in the current year.
Ironically, the airport sector is increasing bond issuance at a time when the credit health of the sector is considered somewhat dubious by analysts. In January Moody’s Investors Service issued a report with a negative outlook on airports. In November 2011 American Airlines parent AMR Corp. declared bankruptcy. By April, AMR had defaulted on $155 million in American Airlines debt.
Yet investors continue to seek private-activity airport bonds. “Buyers have fairly short memories,” Hoogendoorn said.
And the yield bonus that airport AMT bonds pay compared to tax-exempt airport bonds has remained elevated. Prior to the Great Recession it was about 20 to 30 basis points on bonds with an average life of about 20 years, said Todd Spence, a director in Standard & Poor’s transportation group. During the crisis it rose to 100 to 150 basis points. It has declined since but remains at higher than pre-crisis levels.
The spread is now about 50 to 70 basis points, Cure said, while Spence noted that total airport debt issuance tends to be volatile from year to year.
PAB issuance is limited and subject to state volume caps based on a formula published by the Internal Revenue Service. In 2012, the caps were $95 per capita or $284.56 million, whichever was greater. Unused cap can be carried forward for up to three years. Unlike some other alternative minimum tax sectors, airport AMT bonds are not subject to the volume cap, according to Spence.
Unlike most other municipal debt, PAB issuers cannot advance-refund outstanding bonds but can only current refund the bonds, he added.
Except for bonds issued by nonprofits, PABs cannot be advance refunded more than 90 days prior to their maturity or call date, said Todd Greenwalt, partner at Bracewell & Giuliani. As a result, Spence said, waves of new issuance in certain years usually lead to waves of refunding 10 years later, when call dates arrive.