John Hancock bets big on Build America Bonds

The insurance company said it has bought more than $2.6bn of the taxable municipal securities since they were introduced in April 2009 by the US government.

John Hancock Financial Services, the insurance company, is betting big on Build America Bonds.

The company said in a statement it has bought more than $2.6 billion of the new type of municipal security since the Build America Bonds (BABs) program was launched in April 2009.

Unlike traditional municipal bonds, which are tax-exempt, BABs are a taxable security, which means that the bondholders are responsible for paying personal income tax on their interest income up to the US’ highest tax bracket of 35 percent.

But the securities are designed so that the issuers can elect to receive a 35 percent rebate on the cost of their interest payments.

In response to this subsidy, municipal issues all across the issuers have seized the opportunity to issue debt at a lower cost. Approximately $64 billion of BABs was issued in all of 2009, according to the treasury, and strong demand from buyers like John Hancock has spilled over firmly into this year.

In September 2009, John Hancock said it had invested $600 million in BABs. By April 2010, that amount had swelled to $2.6 billion across 60 transactions.

“We regard the program, which opened conventional corporate debt markets to state and local governments, as a win-win for all participants, and we believe it helped the overall economy,” Scott Hartz, Executive Vice President of John Hancock Bond and Corporate Finance Group, said in a statement.

John Hancock is also an active investor in infrastructure funds. The firm is one of the largest investors in SteelRiver Infrastructure Partners, a $1.9 billion North America-focused infrastructure fund. John Hancock was also one of the three investors to try to take-private Chicago’s Midway Airport for $2.5 billion.

Last year, when interviewed by Infrastructure Investor about John Hancock's appetite for BABs vis-à-vis infrastructure equity, George Braun, senior managing director at John Hancock’s Bond and Corporate Finance Group, said the firm’s participation in the BABs program “does not take away money that we have available to invest in equity in infrastructure”.