DALLAS - The North Texas Tollway Authority is considering issuing as much as $500 million of taxable Build America Bonds in June, though discussions are very preliminary, officials say.
Issuing BABs is just one scenario that will be presented to the NTTA board in an upcoming meeting by a team of underwriters. The agency is mapping out financing plans for billions of dollars worth of projects either in progress or in the pipeline.
The NTTA's issue would be modeled on the New Jersey Turnpike Authority's $1.38 billion of the new taxable BABs offered on Monday, officials in Dallas said. The New Jersey bonds priced at 370 basis points over the 30-year Treasury and 297 basis points higher than the Municipal Market Data 30-year AAA general obligation scale.
"It looks like it was a big success," said Rick Porter, bond counsel for the NTTA. "The response showed that there is a market for taxable debt for well known muni issuers."
BABs also open a new market for large issuers like the NTTA that may have saturated the tax-exempt bond market with recent issues, according to market sources. The agency issued $3.5 billion last year, battling the worst market conditions in decades.
Greg Carey, managing director of Goldman, Sachs & Co., on Monday discussed a possible BAB scenario for the NTTA at a San Francisco conference sponsored by the International Bridge, Tunnel, and Turnpike Association.
"This can help take the pressure off the tax-exempt market," Carey said. "And we'll find a nice equilibrium."
While taxable BABs may squeeze the supply of tax-exempt munis in the short-term, munis would still benefit, Carey and others said.
The federal stimulus package included taxable Build America Bonds for tax-exempt issuers, providing a federal subsidy for the interest costs. So far, municipal issuers have come to market with about $1.5 billion of the debt.
"A number of issuers in Texas are looking at the bonds," Porter said. "The question is can you achieve a lower cost of debt?"
One issue for both issuers and buyers is the no-call provisions for BABs. Toll bonds typically include a 10-year call provision. That allows the issuer to retire the debt early when market conditions allow. Taxable investors want protection from early redemptions, so BABs have included "make-whole" calls.
"It really comes down to how much flexibility [issuers are] willing to give up with the no-call provision," he added.
BAB issuers have included the University of Virginia and University of Minnesota.
The city of De Pere, Wis., this week put the BAB comparison to the test by asking broker-dealers to submit multiple bids - traditional tax-exempt, taxable BABs, or both - on a $2.67 million general obligation bond sale.
The law allows issuers of BABs to receive a direct subsidy from the federal government of 35% of the interest paid on the bonds, or investors can receive tax credits worth 35% of the interest paid.
For issuers the federal subsidy can offset the higher cost of paying taxable interest, even as it opens up demand from new investors for a traditionally tax-exempt credit. Issuers can use the proceeds only for capital expenditures, except to pay for issuance costs and for reserve funds.
Issuers should expect additional scrutiny from bankers when they prepare BAB deals, warned Robert Muller, managing director and credit specialist at JPMorgan in New York.
The New Jersey Turnpike deal, he said, required "much more time spent on preparation" than a traditional tax-exempt deal, where "you went to a rating agency and bond insurance company and that's all you had to do."
While taxable financing for toll roads is nothing new, BABs should be "quite attractive to toll roads" and should be "an accepted asset class on the part of the buyer," according to Muller.
"BABs are the exciting, sexy new idea out there," he added.
Pension funds may be a "perfect match" for BABs, in terms of investors, Muller said.
Carey echoed that analysis, saying that "you're going to start seeing a lot more pension money roll into transportation infrastructure" and "not just with [public-private partnerships] but with BABs."
Muller and Carey agreed that Build America Bonds "may actually help the spread of tax-exempt [debt] and Treasuries" if they serve to reduce the supply of tax-exempt muni bonds.
Conference speakers also addressed concerns that Congress could withhold appropriations for the 35% subsidy in the future. Carey said that would be as unlikely as any federal appropriation to state and local government being pulled in the future.
