Reuters: Regulatory News: Some cities ditch Build America Bonds as sequester hits stimulus

Reuters: Regulatory News Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

Some cities ditch Build America Bonds as sequester hits stimulus Apr 15th 2013, 22:32 By Karen Pierog April 15 | Mon Apr 15, 2013 6:32pm EDT April 15 (Reuters) - Monona, Wisconsin, took a step on Monday that would have been unthinkable just a year ago: it refunded $7.67 million of taxable Build America Bonds in the U.S. municipal market. The bonds launched in 2009 as part of the economic stimulus plan have lost their luster since the federal government made the attractive rebates paid to BABs issuers - the element that made them popular with issuers and investors - subject to the across-the-board spending cuts known as sequestration. The move by the city of 7,533 to replace the BABs with tax-exempt general obligation bonds should result in savings of more than $300,000 over the life of the issue, according to Jeffery Belongia, a senior vice president at Hutchinson, Shockey Erley & Co, the underwriter for the refunding. "A lot of other cities are queueing up to get this done, at least in Wisconsin," he said. The subsidy payments on the $181 billion of BABs sold between April 2009 and the end of 2010, initially set at 35 percent of interest cost, were slashed by 8.7 percent from March to Sept. 30, the end of the federal government's fiscal year. How many issuers will follow Monona's lead depends on the language of issuers' extraordinary redemption provisions, market conditions and the types of bond calls. The subsidy cuts to BABs have made many investors in the $3.7 trillion muni market doubt America's Fast Forward Bonds, recently proposed by President Barack Obama to foster infrastructure funding using a similar model to BABs. Several local governments in Wisconsin have put bondholders on notice that the reduced subsidy triggered an "extraordinary redemption" of their BABs, allowing them to be called. Beyond Wisconsin, the city of Columbus, Ohio, is preparing to refund as much as $476 million of debt that carries federal subsidies. "I think we can see a little flurry of activity, but I don't think we'll have a deluge," said John Hallacy, municipal market strategist at Bank of America Merrill Lynch. Hallacy added that the rebate cut may be harder to handle for smaller BABs issuers versus larger issuers, such as states. Illinois, which sold about $2.6 billion of BABs, has no intention of refunding the debt, according to John Sinsheimer, the state's capital markets director. He said the federal rebate, which could return to 35 percent in the future, was not pledged to bondholders. Both Obama and members of Congress have said they are looking into ways to end sequestration. "We're not rushing out to refund bonds that might be good for a long time," Sinsheimer said. BOND CALLS Brian Lanser, an attorney at Quarles & Brady, Monona's bond counsel, said his firm advised the city that the redemption was triggered once it was notified of the reduction by the Internal Revenue Service. "So they suffered a financial consequence of a reduced subsidy," he said, pointing to Monona's provision, which cites changes in the Internal Revenue Code that reduce or eliminate the subsidy or the U.S. Treasury's failure make a subsidy payment "to which the city is entitled." Another consideration is the kind of bond call the issuer can employ. Megan Kilgore, Columbus' assistant auditor, said the city's bonds can be called at par after the June 1 subsidy payment is cut. She added the triple-A-rated city could see significant savings from refunding the BABs with tax-free debt. Both Columbus and Monona are calling the bonds at par instead of a "make whole" provision typically used with taxable debt that takes into account interest payments, as well as principal due bondholders. Hallacy said it would be harder to achieve refunding savings with make-whole calls and he estimated that only under 10 percent of BABs have par calls. California, another big BABs issuer, has a make-whole call option on its debt and has had its subsidy cut by about $12.1 million so far, according to Tom Dresslar, spokesman for State Treasurer Bill Lockyer. "We are studying the extent to which the call can be triggered by sequestration," Dresslar said. "Even if we determine we could exercise the option because of sequestration, we wouldn't unless it penciled out for taxpayers." Hallacy said that tax-exempt interest rates will also be a driving force for BABs redemptions. "I guess if rates dip again to new historic lows you might get people thinking harder about it as long as they don't have make-whole provisions to deal with," Hallacy said. Meanwhile, investors are bailing out of BABs, which were once a stellar performer in the fixed-income market. BABs' total return from the end of 2012 to April 11 was 2.253 percent, according to Bank of America Merrill Lynch indices, still above overall munis at 1.116 percent. However, over the last year BABs' total return was 9.275 percent. Hallacy attributed the drop to the mass migration by investors out of fixed-income into equities as well as sequestration's impact on federal payments. Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions