Build America Borrowers Race Countdown Clock Before Year-End: Muni Credit
From California to New York, issuers are rushing to take advantage of Build America Bond subsidies by accelerating sales of the securities before the program ends.
States and municipalities were set to sell more than $3 billion of the securities next week, according to data compiled by Bloomberg late yesterday. In Chicago, San Francisco, Los Angeles and New York state, issuers said they’re hurrying to market before the program expires Dec. 31, absent an extension.
“We were trying to beat the clock, so we fast-tracked the financing to take advantage,” Charles Perl, deputy chief financial officer of the San Francisco Public Utilities Commission, said yesterday. The district moved up a planned $350 million Build America debt sale to next week, months ahead of its previous schedule, he said yesterday in an interview.
The U.S. government pays 35 percent of the interest costs for the bonds to help communities build roads, bridges and other infrastructure. The securities pay taxable interest, making them similar to corporate debt and attractive to a broader market compared with tax-exempt municipal bonds. The program began as part of President Barack Obama’s economic-stimulus package to spur public works projects by driving down borrowing costs.
An agreement between Obama and Republican congressional leaders this week to keep tax rates from rising won’t extend the Build America program, if it is enacted in the form of a Senate measure that took shape on Dec. 9. That leaves issuers less than three weeks to take advantage of the cost-saving subsidy before it disappears for new borrowing.
“The need doesn’t go away for us,” Perl said. “If it expires, we’ll revert back to the tax-exempt financing we’ve always done.”
Following next week’s sale, Perl’s San Francisco commission will have raised about half of the $4.5 billion it needs for water-system improvements, he said.
More than $179 billion of Build America securities have been sold since April 2009, when the program began, making them the fastest-growing segment of the $2.86 trillion municipal-bond market, according to data compiled by Bloomberg. Issuers have sold $37.2 billion of the debt just in California, the most- populous U.S. state, according to state Treasurer Bill Lockyer.
Officials at Monroe County Water Authority, in northwest New York state by the shores of Lake Ontario, plan to issue $90.7 million in Build America securities next week. The sale was accelerated to go to market before the program ends, said Nicholas Noce, interim executive director of the authority.
“We had planned to issue before, but we did expedite the process to take advantage of the subsidy,” Noce said yesterday in a telephone interview. “The underwriters worked hard and we all worked some long hours to put this deal to market and take advantage of the maximum subsidy.”
In Illinois, the Metropolitan Water Reclamation District of Greater Chicago rushed “quite a bit” to offer $400 million in Build America debt next week, said Harold Downs, the district’s treasurer. He said he wasn’t thrilled with the timing.
“The market is terrible,” Downs said yesterday in a telephone interview.
The average yield on Build America securities climbed to an 11-month high of 6.37 percent this week as investors demanded a larger premium to buy the municipal debt, according to a Wells Fargo index. The yield on 30-year Treasury bonds touched 4.50 percent this week, the highest since May.
Saved $118 Million
The Chicago district used Build America securities to borrow $600 million in August 2009 to help finance a $2.7 billion, five-year rehabilitation of sewer lines, Downs said. He said the district saved about $118 million through the program, cutting the effective interest rate on the $600 million to 3.72 percent, compared with the 4.88 percent prevailing in the tax-exempt market at the time.
If the Build America program isn’t renewed, Downs said the district would sell tax-exempt bonds.
“Of course if the program is renewed, we’d consider that next time too,” he said.
In Los Angeles, the Metropolitan Water District of Southern California plans to offer $250 million of Build America securities as soon as next week. The issue was originally set to go to market next March, said Brian Thomas, the district’s chief financial officer.
The prospect of a program extension by Congress played a role in the original schedule, Thomas said yesterday.
Renewal Was Expected
“We had expected it to be renewed in one form or another, but when that chance began declining, we prepared to go,” Thomas said.
After the planned issue, the district will have funded about $600 million of a $1.8 billion, five-year capital improvement plan, Thomas said.
The district will finance projects through a mix of revenue and tax-exempt debt, in the absence of the subsidy program, Thomas said.
“I think it’s very unlikely that they won’t allow a subsidy in the future,” Monroe’s Noce said of the prospect for either an extension of the current program or its revival later.
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