Build America Sales Have Biggest Week This Year Facing Offsets, Audits

Build America Bond sales swelled this week to the highest of the year as issuers marketed about $3 billion in debt, even as subsidy offsets and the prospect of Internal Revenue Service audits cast a shadow over the market.

Washington state’s $1.16 billion sale of the federally subsidized, taxable debt, its biggest since at least 2000, was the largest of the week’s $8 billion in municipal issues, according to data compiled by Bloomberg. The New York Dormitory Authority sold $800 million of Build Americas, its largest deal this year. The average yield rose to 5.73 percent on May 26 after touching an all-time low of 5.62 percent about three weeks ago, according to the Wells Fargo Build America Bond Index.

“This has been a pretty extraordinary week,” said Alan Schankel, a managing director at Philadelphia-based Janney Montgomery Scott. “I think BABs are as strong as they’ve ever been.”

Average yields on 10-year, top-rated tax-exempts jumped the most in more than seven weeks yesterday. The yield rose 3 basis points, or 0.03 percentage point, to 3.12 percent, according to data compiled by Concord, Massachusetts-based Municipal Market Advisors. The selloff came as U.S. Treasuries tumbled on easing concern that Europe’s sovereign debt crisis will worsen.

Build Americas have still performed better than tax-exempts this month. They returned 0.77 percent through yesterday, compared with 0.72 percent for tax-exempts and a loss of 0.94 percent for U.S. corporates, according to Bank of America Merrill Lynch indexes.

Florida’s Suspension

Florida said it would stop issuing BABs because the U.S. Treasury couldn’t guarantee the subsidy. Maryland’s debt management director, Patti Konrad, said yesterday the federal government trimmed the state’s Build America subsidy for May by about $6,870 to make up for money it owed on other programs.

“As long as it’s a big issuer, I don’t think it has any effect on creditworthiness,” Schankel said of the so-called offsets, linked to such things as missed payroll taxes or Medicaid payments. “They have to pay that money anyway. For smaller issuers, however, it could squeeze them out of the market.”

Build America Bonds are the fastest-growing segment of the $2.8 trillion municipal market, with more than $107 billion sold since the program’s inception in April 2009.

Following are descriptions of pending sales of municipal debt in the U.S.:

NASHVILLE AND DAVIDSON COUNTY, Tennessee, the home of country music’s Grand Ole Opry, plans to sell $575 million in general-obligation debt as soon as next week. The offer will be split three ways, with $250 million in taxable Build America Bonds, $275 million of tax-exempts and $50 million in taxable refunding bonds. Proceeds will help retire and refinance outstanding debt and pay for capital projects. The securities will be marketed by a group led by Goldman Sachs Group Inc. (Added May 28)

NEW YORK, the most-populous U.S. city, plans to offer $900 million in general-obligation notes as soon as next week for capital projects. The sale will consist of $780 million in Build America Bonds, $100 million of variable-rate tax-exempts and $20 million of fixed-rate tax-exempts. Morgan Stanley will lead the sale of the notes, which are rated third-highest by Standard & Poor’s and Fitch Ratings, at AA, and by Moody’s Investors Service, at Aa2. (Added May 27)

MONTGOMERY COUNTY in Pennsylvania, the home of Bryn Mawr College outside Philadelphia, plans to sell $313.8 million in tax-exempt mortgage revenue bonds through its Industrial Development Authority as soon as next week. Income from the sale will finance the building of a hospital on a former golf course. The securities, marketed by Goldman Sachs, will mature serially from 2013 through 2020 and in 2025, 2030 and 2038. (Updated May 25)

To contact the reporters on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

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