Build America Borrowers Race Countdown Clock Before Year-End: Muni Credit
Issuers from across the U.S. are moving up planned Build America Bond sales to this month, making the quarter the biggest yet for the program, which is set to expire Dec. 31 if Congress doesn’t extend it.
States and municipalities are slated to offer more than $3.8 billion of the securities this week, according to data compiled by Bloomberg. Sales of the taxable debt in the last three months of 2010 to date represent about 21 percent of the $179 billion sold since the program began in April 2009, Bloomberg data show.
The securities, which include a 35 percent federal subsidy on interest costs, have allowed state and local governments to borrow at a lower cost than traditional tax-exempt debt. President Barack Obama and Republican congressional leaders left the program out of a tax deal they reached last week, hastening issuers to market.
“We had expected it to be renewed in one form or another, but when that chance began declining we prepared to go,” said Brian Thomas, chief financial officer of the Metropolitan Water District of Southern California.
The district is planning to sell $250 million in Build Americas as soon as this week. The deal had originally been set for March, Thomas said. The market is likely to be “juiced up” by issuers pulling early 2011 deals back to this month, said Chris Mier, a municipal strategist at Chicago-based Loop Capital Markets LLC.
“The issuers close to doing their deals are going to get them done this month,” Mier said. “You’re going to see a little bit lighter supply in January, February, March -- those are the issuers who pulled back to the this month.”
The indecision over the Build America program put upward pressure on long-term tax-exempt yields as 30-year rates jumped 79 basis points since Oct. 29, according to a BVAL benchmark index. That has widened the difference between 2- and 30-year rates, to a so-called spread of 4.06 percentage points Dec. 9, the most since Aug. 18, 2009, according to data compiled by Bloomberg. Yields on two-year debt have risen 9 basis points, or 0.09 percentage point, since Oct. 29.
The average yield on Build Americas fell to 6.33 percent Dec. 9, according to a Wells Fargo index of composite maturities averaging 28.8 years. That’s a post-subsidy cost of about 4.11 percent, which compares with a 4.62 percent yield on top-rated tax-exempts due in 30 years, according to a Bloomberg Valuation index.
In a sale this month by New York’s Empire State Development Corp., 10-year tax-exempts yielded 3.17 percent, while Build Americas of the same maturity sold at 4.61 percent, or 3 percent post-subsidy.
Mutual Fund Flows
How much pressure the potential demise of the Build America program puts on long tax-exempts “will be a function of how much it gets hurt by mutual-fund flows,” said Peter Coffin, president of Boston-based Breckinridge Capital Advisors Inc., which manages about $13 billion in municipal debt, including $600 million in taxables.
Tax-exempt mutual funds shrank for a fifth consecutive week as investors pulled out $538 million in the period ended Dec. 8, according to Chris Holmes, fixed-income strategist at JPMorgan Chase & Co. in New York, citing data from Lipper FMI. The trend is likely to continue as the Build America program expires, he said.
“With prospects for BABs renewal declining, we suspect continued outflows over the near term as investors speculate on the potential impact on tax-exempt valuations,” Holmes said.
The Build America program, the fastest-growing part of the $2.86 trillion municipal market, began as part of Obama’s economic-stimulus package to spur public works projects by driving down borrowing costs.
The San Francisco Public Utilities Commission, which plans to sell $350 million in Build Americas this week, accelerated the offering several months ahead of its previous schedule, said Charles Perl, deputy chief financial officer for the district.
“We were trying to beat the clock, so we fast-tracked the financing to take advantage,” Perl said.
New York’s Metropolitan Transportation Authority’s finance committee today approved a $750 million Build America issue to get in before the deadline. The agency estimates an all-in borrowing cost of 4.65 percent versus 5.5 percent for tax- exempts.
“We think there’s liquidity to sell the bonds,” said Finance Director Patrick McCoy at a meeting today.
The bonds represent about half of the new money financing the MTA planned for next year.
Build America sales this quarter are set to be $39.3 billion, the most since the last three months of 2009, when $26.6 billion were issued, according to data compiled by Bloomberg.
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