As the year draws to a close, it is quite evident that the Build America Bond program has been the most significant new development in the municipal market in 2009. The program is a direct result of the American Recovery and Reinvestment Act that U.S. President Barack Obama signed into law in February of this year. The Build America Bonds program, which offer a 35% rebate from the Federal government to issuers on their interest payments, has allowed local governments to tap into the taxable-bond market, bringing in buyers who typically would be interested in corporate, Treasury or agency debt. While the Build America Bonds took a little time at the outset to gather momentum, they are now a major factor in the fixed income markets and are readily accepted by the investment community. In fact, Build America issuance has already eclipsed $61 billion for a monthly average of greater than $6.7 billion since they began in April.
From an issuer’s perspective, the motivation to issue BABs instead of tax-exempt debt is clear and simple: to save money. Consequently, issuance of BABs is expected to remain at high levels in 2010 – perhaps as much as 50 percent more that this year’s total. According to estimates, the stimulus initiative may produce $9.17 billion a month in deals next year, as more issuers seek lower net borrowing costs than on traditional tax-exempt financing. This has implications on the tax-free market, as well, as a decline in issuance of tax-free bonds will provide price support to longer-term munis.
Clearly the impact of the Build America Program on the municipal market has been considerable. Nearly 20% of municipal borrowing this year has been in the taxable market, compared with 7% over the previous 10 years. The question remains as to whether 2010 could be the program’s last year. The original authorization is set to expire at the end of 2010 with the rest of the tax credit provisions created by the American Recovery and Reinvestment Act. However, there seems to be a market consensus that BABs will be extended by Congress.