(Bond Buyer) – The unit investment trust has quietly blossomed into the dominant investing vehicle for Build America Bonds — the taxable municipal debt created under last year’s stimulus legislation.

Four companies — chief among them Invesco Van Kampen — have launched more than 110 BAB UITs with roughly $3.3 billion in total assets.

Without getting much press, BAB UITs are now considerably bigger than BAB-devoted mutual funds, closed-end funds, and exchange-traded funds combined.

Market participants say UITs are suitable for the type of investing people use BABs for: passive, long-duration exposure.

“Investors are looking for an investment vehicle that can provide consistent income,” said Craig Falduto, head of unit investment trust research at Van Kampen. “It’s a very consistent income stream.”

The typical UIT fee structure involves a fairly heavy upfront payment followed by low annual costs until liquidation. Because BAB trusts tend to be long term, an investor enjoys lower overall costs with the UIT structure than with something like mutual or closed-end funds, which entail higher annual expenses.

“Usually, the longer the trust the better the argument gets with the UIT,” said Richard Stewart, senior vice president of unit investment trusts at Advisors Asset Management — the first company to launch a BAB UIT. “It gives you a lower average annual expense. You’re spreading it over more years.”
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(Bloomberg) – Build America Bonds and tax-exempt notes had their biggest gains in a year, as demand for municipal debt helped boost returns in August above corporate and U.S. Treasury securities.

Yields were driven to record lows last month as investors sought the perceived safety of the municipal market amid concern the economic recovery may be slower than expected. Demand for city and state obligations overwhelmed supply, said Neil Klein, a fixed-income senior portfolio manager at Carret Asset Management LLC in New York.

“You have a lot of investors that see risks in other investments,” said Klein, who oversees $800 million in municipal holdings. “The muni market is resilient, and the demand illustrates that.”

Tax-exempt bonds posted their best monthly performance since September 2009, returning 2.4 percent, according to the BofA Merrill Lynch Municipal Master Index, which tracks total return on tax-exempt bonds.

Build Americas had an eighth straight positive month, with the bonds’ Merrill index advancing 4.7 percent in August, the biggest gain since a 5.2 percent move in July 2009.

Average yields on the federally subsidized securities were 5.49 percent on Aug. 26, the lowest on record according to the Wells Fargo Build America index, which dates to August 2009. The index fell about 52 basis points during the month after ending July at 6.04 percent. A basis point is 0.01 percentage point.

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(Bloomberg) The Build America Bond program has lowered the financing costs for local government projects and drawn interest from pension funds, foreign investors and others who don’t typically buy municipal debt, a study found.

The program, under which the federal government subsidizes the taxable debt, cut the average borrowing cost to 2.32 percent in 2009, 0.54 percent less than municipalities would have to pay in the tax-exempt bond market, according to the report published this week on the website of the National Bureau of Economic Research.

The securities are the fastest-growing part of the $2.8 trillion municipal market and have raised $131 billion for issuers to date, according to data compiled by Bloomberg.

“The BAB program is designed to broaden the clientele holding municipal debt and lower the borrowing cost of local and state governments funding capital and infrastructure projects,” the study’s authors Andrew Ang, Vineer Bhansali and Yuhang Xing wrote. “We find that this goal has been met.”

The results of the study are in line with findings by the U.S. Treasury that the bonds succeeded in saving local governments money.

The securities pay higher yields than traditional tax- exempt bonds, which can make them attractive to overseas buyers and others who don’t have to pay U.S. tax. Retail investors in the U.S. receive a better yield with traditional tax-exempt bonds: 2.86 percent, compared with an after-tax yield of 2.32 percent for the Build America Bond, the study found.

‘Not for Individuals’

For an individual investor, “BABs are poor investments,” the authors wrote. “In this light, the BAB program can be interpreted as a wealth transfer from the natural holders of municipal bonds, who are individual U.S. taxpayers, to corporations, pension funds, and foreign investors not subject to individual U.S. income taxes.”

The program, which was created by the federal government to stoke the economy, offers a 35 percent interest-cost subsidy to states and local governments and is set to expire at the end of the year unless Congress passes an extension. Legislation to prolong it has been approved in the House of Representatives, only to run aground in the Senate.

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(Bond Buyer) – A National Bureau of Economic Research study has concluded that while Build America Bonds have succeeded in their mission to lower financing costs for state and local governments, traditional tax-exempt bonds still offer more enticing after-tax yields to individual investors.

On average, state and local governments saved 54 basis points per year by issuing BABs instead of tax-exempts, according to the new study. It analyzed 6,177 different BAB transactions totaling $63.4 billion that were issued from April through December 2009 and compared them to the 95,233 tax-exempt deals totaling $332.2 billion that were issued during the same period.

“To our knowledge, our paper is the first formal analysis of the BAB market not produced by the federal government,” the study’s authors wrote.

The National Bureau of ­Economic Research is a 90-year- old private, nonprofit, nonpartisan research organization that ­specializes in economic issues and is based in Cambridge, Mass., with a branch office in New York City.

The study is dated May 2010 but was not released until this week.

The Treasury Department has released several studies of the BAB program, touting the significant savings it can offer issuers. The Obama administration has proposed making the program permanent at a reduced subsidy level.

BABs offered issuers an unsubsidized yield of 3.69%, which dropped to an effective yield of 2.32% on average after including the federal subsidy payments equal to 35% of interest costs. By comparison, tax-exempt bonds on average offered issuers an after-tax yield of 2.86% during that same time period.

But those savings might be understated, since the study notes that regular tax-exempt yields also have been lowered by the existence of the BAB market, which has made room on the supply side of the tax-exempt market by moving more deals to BABs.

“The Obama stimulus package has succeeded in reducing the financing costs of local and state governments in funding infrastructure projects,” the study stated.

While the BAB program does not offer a more appealing investment opportunity to individuals, the program is attractive to new types of muni investors — those with no U.S. tax liabilities.

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(Bloomberg) – Pennsylvania Turnpike Commission, which runs a tollroad stretching from New Jersey to Ohio, is selling $600 million in Build America Bonds today in a bet that Congress will cut or reduce the federally subsidized program.

The operator of the country’s oldest state turnpike is borrowing to cover two years of project financing to lock in the 35 percent interest subsidy, said Nikolaus Grieshaber, the commission’s chief financial officer. The issue is the week’s largest offering and the agency’s first sale of the taxable securities since June 2009.

Issuance of Build America bonds may surge after Labor Day, as states and municipalities seek lower borrowing costs, said Alan Schankel, director of fixed-income research for Philadelphia-based Janney Montgomery Scott LLC.

“We had been doing our financing annually,” said Grieshaber. This week, “we’re taking full advantage of the 35 percent by doing it for two years,” he said in an interview.

About $3.1 billion in issuance is scheduled for this week, the lowest total for a full trading week since the $2.9 billion offered the week prior to Labor Day last year, according to data compiled by Bloomberg. Getting the deal priced before the holiday was important to the commission, Grieshaber said.

“This is a good time to offer this debt,” he said. “Hopefully participants will be focused on this deal and provide us with low borrowing costs.”

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(Business Wire) – BlackRock, Inc. /quotes/comstock/13*!blk/quotes/nls/blk (BLK 149.03, +2.46, +1.68%) announced today that the BlackRock Build America Bond Trust , the “Trust”, a non-diversified closed-end registered investment company that invests primarily in taxable municipal securities known as “Build America Bonds,” has completed pricing its common share initial public offering, which will close on August 31, 2010, raising approximately $1.015 billion (exclusive of the underwriters’ overallotment). The total amount raised could be increased to approximately $1.165 billion assuming full exercise of the underwriters’ overallotment, which may not occur.

BlackRock Advisors, LLC is the investment advisor to the Trust. The Trust began trading on the New York Stock Exchange on Friday, August 27, 2010. The Trust’s common shares were distributed through a group of underwriters led by Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Morgan Stanley & Co. Incorporated, UBS Securities LLC and Ameriprise Financial Services, Inc.

“We believe the BlackRock Build America Bond Trust is an attractive fixed income option for investors seeking exposure to taxable municipal securities offering a potential yield advantage and lower default risk than similarly rated corporate bonds, as well as high current income and capital appreciation potential,” said Frank Porcelli, Managing Director and Head of U.S. Retail at BlackRock. Porcelli went on to say, “This Trust, which provides investors access to the Build America Bond Program i the fastest growing segment of the $2.8 trillion municipal market i plays a very important role in BlackRock’s commitment to providing a diverse range of closed-end fund options.”

BlackRock will pay the Underwriters a standard expense for advice relating to the structure, sale and distribution of the Trust. This expense is expected to be recorded in the third quarter of 2010.
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(Bloomberg) – Bexar County Hospital District, which encompasses San Antonio, the seventh most-populous U.S. city, cut its borrowing costs 23 percent from 2009 as it sold $205 million in Build Americas amid plunging municipal issuance.

States and municipalities are set to sell about $1.9 billion next week, the lowest total for a full trading week since Dec. 19, 2008, according to data compiled by Bloomberg. About $7.1 billion in debt was issued this week, including $1.2 billion marketed only to investors in Puerto Rico.

Concern that the U.S. recovery is slowing has driven investors to Treasury and municipal debt, sending yields to historic lows. Average Build America yields touched a record-low of 5.54 percent Aug. 24, according to the Wells Fargo Build America Bond index, which began about a year ago.

“The market has been very strong even at these new levels,” said Regina Shafer, assistant vice president of fixed- income investments for USAA Investment Management Co. in San Antonio.

Investor demand combined with a shortage of supply further depressed yields, said Shafer, who manages $5.3 billion of tax- exempt municipal bonds.

The Bexar hospital district, which operates as the University Health System, sold bonds due in 2040 priced to yield 5.41 percent, or 185 basis points above 30-year U.S. Treasuries. The district also sold 30-year Build Americas last August, which were priced to yield 6.9 percent, or 240 basis points above the benchmark. A basis point is 0.01 percentage point.

Seeking a Haven

Investors seeking a haven amid speculation of a renewed U.S. recession were drawn to Bexar’s sale, according to Raul Villasenor, senior vice president of First Southwest Co. in San Antonio, the financial adviser on the deal.

“There’s no question this is a very strong underlying credit,” Villasenor said. “Otherwise we would have seen spreads a lot higher. We’re very pleased with that.”

Top-rated Austin, the capital of Texas, yesterday sold about $80 million in tax-exempt public improvement bonds, with 10-year securities priced to yield 2.37 percent, 21 basis points below an index of AAA debt, according to Concord, Massachusetts- based Municipal Market Advisors. The index, which began in January 2001, is at the lowest level ever.

“It’s still a time to be very careful, but investors are realizing municipal bonds aren’t that risky,” Shafer said.

Build Americas

Bexar’s sale comes with the future of the Build America Bonds still undetermined.

The program was created last year as part of President Barack Obama’s economic-stimulus package. Issuers, which are eligible for a 35 percent federal subsidy on interest costs, have sold about $130 billion of the taxable securities. A bill was introduced in the U.S. House of Representatives July 28 to extend the program by two years.

Bexar’s Build Americas include an “extraordinary redemption” of 100 basis points above Treasuries, according to a release from Siebert Brandford Shank & Co., which marketed the sale to investors. Such a redemption would protect the district from the elimination of federal subsidy payments.

Yesterday’s offering was the district’s final debt sale to fund a $899 million capital plan, according to an Aug. 16 report from Fitch Ratings, which ranked the bonds AAA. About $770 million for the plan is financed by tax-supported debt, with an additional $130 million coming from cash reserves, the report said.

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(Bloomberg) – Texas issuers led by San Antonio’s Bexar County and Austin, the state capital, are set to borrow $990 million this week, almost three times more than last week, as taxable and tax-exempt yields plunge to record levels.

The risk of a renewed U.S. recession led investors to the perceived safety of Treasuries, pushing 10-year benchmark yields to a 19-month low this week. Top-rated tax-exempt municipal yields due in 10 years fell 2 basis points yesterday to 2.58 percent, the lowest ever, according to data from Concord, Massachusetts-based Municipal Market Advisors dating to January 2001. Bond prices move inversely to yields.

“Munis are shining right now, even at the lower rates,” to David Jaderlund, who works in fixed-income trading and sales for Hampstead Group in Dallas, an investment adviser who buys debt only from Texas issuers.

The state doesn’t charge income tax, so resident investors don’t benefit from the usual double-tax exemption on muni debt.

Yields on top-rated 10-year debt haven’t risen since June 15, according to MMA. With an increase in 10-year Treasury yields yesterday, the top-rated, 10-year municipal bonds yield ratio fell to 97 percent, the smallest in three weeks, according to data compiled by Bloomberg.

“It appears the market is telling you we’re entering into a disinflationary world at best, if not a deflationary world,” said R.J. Gallo, portfolio manager at Pittsburgh-based Federated Investors, which has $33 billion in municipal holdings.

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(Bloomberg) – Miami-Dade County sold about $188 million in Build America Bonds for transport projects as yields on the taxable debt reached a record low and three months after Florida stopped issuing the securities.

The offer, backed by a sales surtax, comes as yields on the federally subsidized bonds touched 5.54 percent yesterday, the lowest since the Wells Fargo Build America index began in August 2009.

“Our three prior BABs issues have been quite beneficial to the county,” Lidia Monzon-Aguirre, director of the division of bond administration, said in an interview in her Miami office before the sale. “The scheduled subsidy payments have been made several weeks before they’re due.”

In May, Ben Watkins, Florida’s debt manager, said the state would stop selling Build Americas until the federal government guaranteed the subsidy payment, which it can withhold if the issuer owes money through programs such as Medicaid. Alan Krueger, Assistant Treasury Secretary for Economic Policy, said Aug. 23 that concerns about the 35-percent rebate on interest costs were “overblown” as 99.5 percent of subsidies have been paid.

The offer has an extraordinary call option that lets the county refund the bonds if the federal government stops the subsidy payments, which added to the interest costs, said Hinton.

Risk Premium

The largest portion of the offering, which matures in 2040, had a yield of 5.62 percent, or 207 basis points above comparable Treasuries, said Hinton. In September, the county sold 30-year obligations priced 265 basis points above the Treasury benchmark. A basis point is 0.01 percentage point.

The county also issued $30 million in tax-exempt bonds. The original ratio was $204 million in Build Americas and $13 million in tax-exempts. Lower yields on shorter-term tax-exempts led the issuer to change some of their maturities from Build Americas to tax exempts, said Frank Hinton, bond analyst with Miami-Dade.

Maryland Transportation Authority, which has the same grade from Moody’s Investors Service and Fitch Ratings, sold about $297 million in Build Americas July 14, with 31-year obligations priced 165 basis points over Treasuries.

“We went out at levels we thought were aggressive,” said Hinton. “I think we did well.”

Sales Surtax

Miami-Dade’s debt will be backed by 80 percent of Miami- Dade County’s half-cent transit system sales surtax. The proceeds from this issue will be used to help fund transit and public works projects, including a 2.4-mile extension of the metro system to Miami International Airport, which is scheduled to be completed by 2012.

The county is authorized to issue as much as $1 billion in bonds backed by the surtax. Excluding the current issue, the county has about $760 million in outstanding debt.

Moody’s warned in its report that its rating “may be unsustainable if the county continues to aggressively issue new surtax backed-debt.”

Standard & Poor’s rated the bonds, which will be underwritten by a group led by Loop Capital Markets LLC, third- highest at AA. Moody’s and Fitch gave them their fourth-highest rating at Aa3 and AA-, respectively.

Ridership and sales-tax revenue both declined during the recession. Sales-tax revenue pledged to the bonds fell 9 percent to $10.4 million in May from the same month two years earlier, according to bond documents. Ridership fell 16 percent over the same period to 8.1 million, according to Miami Dade Transit technical reports.

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(Bloomberg) – Build America Bond subsidies are rarely withheld and concerns among states about it are “overblown,” a U.S. Treasury Department official said, moving to quell worries about the reliability of the payments.

Money has been held back from only seven of the 278 Build America subsidy payments sought by states, Alan Krueger, Assistant Treasury Secretary for Economic Policy, said in a speech today to the National Association of State Treasurers. “Hardly any payments” have been withheld to satisfy other debts owed to the government, he said, as the Treasury paid 99.95 percent of the $626.45 million requested by states.

“A small number of officials have raised concerns that BABs subsidies would be offset because the government entity owes the federal government tax or other revenue,” Krueger said in the speech at a meeting in Williamsburg, Virginia. He said this criticism “has been overblown.”

Krueger addressed worries about the Build America program, which began last year and has become the fastest-growing part of the $2.8 trillion municipal market. Issuers receive a 35 percent subsidy from the Treasury Department for interest costs on the debt, which is used for construction projects. States and local governments have sold $129 billion of the securities.

Subsidy Withholding

There has been some concern among officials that the Treasury may withhold subsidies in cases where the states owe money. In May, Florida’s debt manager, Ben Watkins, said Florida would stop selling the securities because of those concerns. Krueger said the payment statistics should ease such worries.

“The Build America Bonds program has been a great success,” he said in his speech. “It is hard to look at these statistics and not conclude that the risk of offsets under the BABs program has been very minor.”

The program is set to expire at the end of the year unless Congress passes a proposed extension. Legislation to prolong it has been approved in the House of Representatives, only to run aground in the Senate.

Krueger said he’s “hopeful” that the program will be extended, though he acknowledged it has been difficult for Democrats, who control both chambers, to get the 60 votes needed to overcome stalling tactics in the Senate. Local-government groups have lobbied for keeping the program alive. After returning from an August recess next month, the House may vote on a new bill to prolong the program through 2012. Passage would give Senate supporters another chance to bring it to a vote.

Bipartisan Support, Once

“The BABs program, when it was initially authorized, had bipartisan support,” Krueger said. “The only thing we have learned since then is that it’s been successful.”

“I would think that would bring more support to the program,” he said. “But finding 60 votes has not been so easy in the Senate.”

Krueger also addressed criticism that the program produced high fees for Wall Street investment banks. Initially, Build America debt underwriting expenses were higher because of the start-up costs for using new financial products, he said. More recently, the costs have fallen amid competition from banks seeking to sell the bonds.

“Even taking underwriting fees into account, state and local governments have still saved over $12 billion in present value from issuing BABs,” Krueger said.