Build America Bonds extension could lure more institutional buyers

But even as more institutional investors are predicted to buy up this new type of municipal debt if it is allowed to be issued beyond 2010, industry insiders see little competition between the bonds and PPPs.

US President Barack Obama's proposal to permanently extend the popular Build America Bonds program beyond its 2010 sunset date could lure more institutional buyers to the market for this new type of municipal debt, according to a panel of experts on the subject.

“It would make more investors care about it,” George Friedlander, the head of municipal strategy at Morgan Stanley Smith Barney, said at a public forum on Build America Bonds at New York University on Wednesday.

“If you say now it is a permanent program, all of a sudden there is an incentive for potential buyers, institutional buyers, to say, 'yes, lets have somebody on our team understand better the nature of local credits because we know for the foreseeable future there is going to be an investment choice that includes these credits,'” Friedlander added.

The bonds, introduced a year ago by the $787 billion American Reinvestment and Recovery Act, have been widely used by state and local governments to finance their infrastructure needs throughout 2009. Approximately $64 billion in securities were issued last year alone, according to the US Treasury.

Despite their popularity, though, Friedlander and other speakers at the forum didn't foresee much competition between Build America Bonds and other forms of financing public works, such as public-private partnerships (PPPs). Charles Peck, a vice president at investment bank Morgan Stanley's public finance division, said that municipalities will continue to run a “multi-track process” of assessing the relative attractiveness of Build America Bonds versus PPPs side by side.

Peck said that he was currently working on a deal to help the city of Pittsburgh raise money by leasing its parking assets to the private sector, an instance in which a PPP was clearly the best alternative.

“In other cases, it's not that straightforward,” he added.

President Obama's proposal could also cause Build America Bonds issuance to surge toward the end of 2010. Under current regulations, issuers can get 35 percent of their interest cost reimbursed by the federal government. Under the president's proposal, that subsidy would fall to 28 percent starting next year, if the program is extended.
Friedlander said this could cause a rush to market later this year as issuers try to take advantage of the higher subsidy rate before it expires. “The fourth quarter of this year could be chock-full of Build America Bonds,” he said.

He predicted total Build America Bond issuance could top $100 billion in 2010.

Looking beyond 2010, an extension of the Build America Bonds program is “almost assured”, Matt Fabian, a managing director at Massachusetts-based Municipal Market Advisors, said at the forum. Fabian credited his confidence to broad support for the extension among lobbying groups and members of Congress.

The forum, Growing Our Way Out of Crisis: Private Perspectives on Public Works, was sponsored by New York University's Institute for Public Knowledge.