WASHINGTON — Two Midwestern issuers have disclosed that they will redeem Build America Bonds in early June because their subsidy payments were reduced due to sequestration.
The issuers disclosed the planned redemptions in event notices filed with the Municipal Securities Rulemaking Board's EMMA system earlier this month. Several other issuers have also recently disclosed their intentions to redeem BABs.
The Port Clinton City School District in Ohio plans to redeem all of the $24.76 million of BABs it issued in 2010 on June 5. They will be current refunded, with the refunding bonds to be issued a day earlier.
The City of Kalamazoo, Mich., will redeem a total of $9.96 million of outstanding BABs from two 2009 issues on June 2. The BABs have already been defeased, the city said in two notices. The BAB program allowed state and local governments in 2009 and 2010 to issue taxable bonds and receive subsidy payments from the Treasury Department equal to 35% of the interest costs. But the payments to issuers were reduced by 8.7% for part of fiscal 2013 and are being reduced by 7.2% in fiscal 2014, which began Oct. 1, because of federal spending cuts known as sequestration.
The Port Clinton City School District, which is located between Toledo and Cleveland, was originally scheduled to receive subsidy payments of $268,443.88 in both May and November of 2013. However, it instead received payments of $245,089.25 last May and $249,115.91 in November, the issuer said in its event notice.
Jeff Dornbusch, treasurer for the school district, said that market conditions are favorable for refundings and that there is a concern that Congress could continue sequestration for 25 years.
Currently, sequestration for mandatory spending, which includes BAB subsidy payments, is slated to be in effect through fiscal 2024.
Kalamazoo received reduced subsidy payments in connection with the September 2013 and March 2014 interest payments for its BAB issues, but did not provide the specific dollar amounts in its event notices.
For both issuers, the reduced subsidy payments triggered extraordinary optional redemption provisions for the bonds. The provisions allow each of the issuers to redeem some or all of their BABs at a price equal to 100% of the principal amount plus accrued interest.
The Ohio issuer's bonds were issued to finance the construction and improvement of school district buildings and facilities. Stifel, Nicolaus & Co. was underwriter. Squire, Sanders & Dempsey LLP, now Squire Sanders (US) LLP, was bond counsel.
Kalamazoo issued its BABs to finance the construction of additions, extensions and improvements to its wastewater and water supply systems, according to bond documents. It issued $2.585 million of wastewater system revenue bonds, $2.275 million of which is outstanding, and $7.685 million of water supply system revenue bonds in 2009 that were designated as BABs.
Mesirow Financial, Inc. was underwriter for both deals. Miller, Canfield, Paddock and Stone, PLC was bond counsel.
