(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) – Massachusetts sold $358 million in Build America Bonds at rates rivaling those obtained by the higher-rated Ohio Water Development Authority last week, as yields on the taxable debt held close to a three-month low.

Massachusetts issued the bonds yesterday in a 21-year maturity yielding 4.50 percent, or 80 basis points above 30-year Treasuries, according to data compiled by Bloomberg. The state is rated second-highest by Moody’s Investors Service at Aa1, and third-highest by Standard & Poor’s at AA. A basis point is 0.01 percentage point.

The top-rated Ohio authority sold about $429 million in Build Americas, which included a 24-year maturity yielding 4.88 percent, or 95 basis points above a benchmark Treasury. The Kansas Transportation Authority, rated AAA by S&P and one step lower by Moody’s, on Aug. 17 issued about $325 million in Build Americas that included a 25-year issue at 4.60 percent, or 83 basis points above Treasuries.

“It’s trading really tight to AAA spreads — that’s a function of how well it’s viewed in the market,” said Peter Delahunt, managing director of trading risk in the municipal bond department at Raymond James & Associates Inc. in New York. “Massachusetts always trades very strong. It’s a good credit and there is not a lot of long-duration product out there for taxable-portfolio managers.”

Build Americas yield about 5.75 percent on average, according to the Wells Fargo Build America Bond index. The yield touched 5.70 on Aug. 16, the lowest since it reached 5.66 percent on May 25. The index has an average maturity of 28.83 years and an average credit rating of Aa3 and AA- from Moody’s and S&P, respectively.

‘Important Tool’

Citigroup Inc. won a competitive bid to market the Bay State’s securities, which will be used to pay for capital- improvement projects.

“Although the Build America Bond program is relatively new, it’s become an incredibly important tool for issuers,” Massachusetts Treasurer Tim Cahill said in an e-mail. “This program allows us to borrow very efficiently in the larger, more liquid taxable market. The end winner is taxpayers, who get the benefit of public infrastructure financed at the lowest possible rates.”

The U.S. government subsidizes 35 percent of the interest cost of Build America securities, which were authorized under the economic stimulus legislation passed by Congress and signed by President Barack Obama last year. Issuers have sold about $128 billion of the debt.

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(Bloomberg) – Chicago, whose credit rating was cut by two companies this month, is selling $164.1 million of municipal bonds for schools as its cost of borrowing has risen about 40 percent for taxable Build America securities.

The city plans to issue debt today to fund a $1.25 billion capital plan for the Chicago public school system. The district, with a $370 million budget deficit, faced having to fire 1,200 teachers until a federal jobs bill passed this month brought $105 million to maintain the workers, the Chicago Tribune reported.

The extra yield investors demand for Chicago’s Build America Bonds over 30-year U.S. Treasuries has widened 42 percent since a bond sale in January, according to data compiled by Bloomberg. The spread was about 223 basis points Aug. 16, up from 157 on Jan. 14. In the same period, the spread between a Wells Fargo Build America index and benchmark federal debt has widened about 24 percent to 199 basis points.

“There’s no doubt the market is penalizing them,” said Justin Hoogendoorn, a bond strategist at BMO Capital Markets in Chicago.

Chicago, the third most-populous U.S. city, has seen its tax revenue challenged by an unemployment rate of 10.6 percent, higher than the national average of 9.5 percent. Foreclosure filings in the first half for the Chicago area climbed 23 percent to 78,022, according to RealtyTrac Inc.

‘Serious Issues’

Chicago’s longer-maturity bonds may price at 280 basis points over Treasuries and 10-year securities at a spread of 100 basis points, said Richard Saperstein, managing director of Hightower Advisors LLC in Chicago. He said he isn’t buying.

“I’d rather have a bond that has the potential for an upgrade than one that would risk deterioration,” Saperstein said. “Chicago has some serious issues. They’re only going to get worse.”

The city, whose rating was cut by Fitch Ratings and Moody’s Investors Service because of shrinking reserves, is selling $143.4 million of taxable Build America Bonds and $20.7 million of tax-exempt debt through banks led by Samuel A. Ramirez & Co.

The U.S. government subsidizes 35 percent of the interest cost of Build America Bonds, which were authorized under the economic stimulus legislation passed by Congress and signed by President Barack Obama last year.

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(Bloomberg) – Columbus, Ohio, the capital whose borrowings are rated one level above the state’s, sold about $430 million in AAA debt that included more than $266 million in Build America Bonds, the week’s second largest such offer.

Ten-year general obligations were priced to yield 3.4 percent, according to a person familiar with the deal, which is 25 basis points higher than $325 million in bonds issued earlier this month by comparably rated Montgomery County, Maryland. A basis point is 0.01 percentage point.

Columbus may have paid a premium because the largest sections of the five-portion deal may not qualify for inclusion in indexes, said Anthony Shields, a principal in the public- finance department at Williams Capital Group in New York.

“Because there are so many parts, there’s no benchmark, and that actually hurts the deal rather than helps them,” Shields said. “A lot of people who buy the BABs want to buy the bonds that are in an index,” he said, referring to the Build America segment.

The Build America Bond program, under which the federal government pays 35 percent of the interest costs of taxable bonds sold to pay for public works projects, was created last year as part of President Barack Obama’s economic-stimulus package to help ease borrowing by state and local governments. The program was set to expire at the end of 2010, but a bill was introduced yesterday in the U.S. House to extend it two years.

“We’ll probably end up close to a 50/50 split between tax- exempts and taxables,” said Steve Wentzel, Columbus’s debt management specialist. Final pricing information won’t be available until today.

Municipal Boon

Build Americas have been a boon for state and local governments, which have sold about $124 billion of the securities. They also have been a plus for investors, according to Justin Hoogendoorn, a bond strategist at BMO Capital Markets in Chicago.

“What we’re telling clients is that BABs and the broader municipal market in general are very favorable compared with corporates right now,” Hoogendoorn said. “Ohio paper is definitely pricing wider than the overall market, but with Columbus, I wouldn’t expect them to have too many problems with pricing on the deal.”

This month, top-rated taxable municipal securities have returned more than triple the rate of comparable corporate bonds, according to indexes compiled by Bank of America Corp.’s Merrill Lynch & Co.

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(Bloomberg) – Texas, the second most-populous U.S. state, is set to benefit from its top ratings when it borrows $1.5 billion for roads tomorrow, the week’s largest municipal bond deal and the biggest Build America issue in a month.

The state, through the Texas Transportation Commission, is selling $1.38 billion as taxable Build America Bonds, debt that comes with a 35 percent interest-rate subsidy from the federal government, and $115.6 million of tax-exempt securities for bridge and highway projects.

Investors have been distinguishing between different quality Build Americas in recent months, said Chris Mier, municipal strategist and managing director with Loop Capital Markets LLC in Chicago. Spreads above Treasuries for top-rated municipal issuers have been narrowing compared with borrowers with lower credit scores.

“There’s been a little bit of a break for top-rated issuers,” Mier said. “For those without the well-known name, it will be a wider spread than it was two or three months ago.”

Top-rated University of Virginia sold $190 million of 30- year Build America Bonds July 21 priced to yield 4.9 percent, the lowest on record for that maturity, or a premium of 95 basis points to longest-dated Treasuries. A basis point is 0.01 percentage point.

The same day, the Sacramento, California, Municipal Utility District, with the fifth-highest investment grades from Standard & Poor’s and Moody’s Investors Service, sold $250 million 26- year bonds at a spread of 225 basis points above the benchmark. The spread on a previous sale by the agency, in May 2009, has widened 100 basis points in trading since April to 222 basis points by July 21, according data compiled by Bloomberg.

Average Yield

The average Build America Bond yielded 6.05 percent on July 23, according to a Wells Fargo & Co. index that began last August. Build Americas’ yield spread above 30-year U.S. Treasuries reached a record high of about 207 basis points this month, up from 142 basis points in early May, Bloomberg data show. The spread increased in part as Treasury rates fell amid signs the economy is slowing.

“The BABs market has become a little more discerning on credit quality,” said Tom Boylen, managing director at BMO Capital Markets in Chicago. “Everyone is more cognizant of credit.”

Issuers have sold about $122 billion of Build Americas since they were created as part of last year’s $862 billion economic-stimulus package. The program expires at year-end.

International Buyers

The taxable municipal bonds have offered international buyers higher yields than some corporate bonds, coupled with lower default risk. Investors in the U.S. and from other countries “are more comfortable with things they’ve heard of,” Mier said.

“You’ve got a lot of domestic issuers and international investors with no prior experience in munis,” he said.

Yields on top-rated, tax-exempt general obligations that mature in 10 years averaged 2.86 percent on July 23 for a third consecutive day, the lowest in at least nine-and-a-half years, according to Municipal Market Advisors data since January 2001. The securities have not had an increase in yields since June 15, data from Concord, Massachusetts-based MMA show.

This week’s total scheduled municipal issuance of $7.9 billion includes about $2.3 billion in Build America debt. Both figures are the highest since late June, when the Bay Area Toll Authority sold $1.5 billion in Build Americas, the last sale comparable to the Texas deal.

The city of Columbus, Ohio, has the third-largest scheduled sale of the week, a $430 million issue that includes the second- largest Build Americas issue, totaling about $280 million.

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(The Bond Buyer) – The California municipal market was mostly flat with a slightly firmer tone Thursday, amid elevated secondary trading activity, as San Francisco Public Utilities Commission competitively sold $344.2 million of taxable Build America Bonds.

“The market still is very firm in spite of Treasuries going down,” a trader in Los Angeles said. “I think it has a lot to do with supply and demand. There is really very little supply in the marketplace. All the new issues seem to come to market priced through with the expectations of where its going to be. At higher prices they do tend to get cleaned up.”

The trader also noted that the secondary market “has been active today.”

“I have noticed that things were marked up from yesterday, and are actually trading today,” the trader said. “You get the picture that Treasuries really don’t govern the municipal market. I think what it’s really governed by right now is the supply and demand. And there’s not enough supply and there seems to be a little more demand than supply. It seems to be firm.”

In the California new-issue market the San Francisco Public Utilities Commission competitively sold $344.2 million of taxable BABs to Bank of America Merrill Lynch, with a true interest cost of 3.81%.

The BABs mature from 2022 through 2027, with a term bond in 2040. Yields range from 4.90% in 2022, or 3.19% after the 35% federal subsidy, to 6.00% in 2030, or 3.90% after the subsidy, all priced at par. The bonds were priced to yield between 195 and 275 basis points over the comparable Treasury yield.

The San Francisco PUC also competitively sold $102.7 million of tax-exempt bonds to JPMorgan, with a TIC of 2.53%.

The bonds mature from 2015 through 2021, with yields ranging from 1.51% with a 5% coupon in 2015 to 3.00% with a 3% coupon in 2021. Bonds maturing in 2016 were not formally re-offered. The bonds are callable at par in 2020.

The credit is rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s.

The Treasury market showed losses Thursday. The benchmark 10-year note was quoted recently at 2.94% after opening at 2.87%. The 30-year bond was recently quoted at 3.95% after opening at 3.93%. The two-year note was recently quoted at 0.57% after opening at 0.56%.

The Municipal Market Data triple-A scale yielded 2.57% in 10 years and 3.67% in 20 years Thursday, matching levels of 2.57% and 3.67% Wednesday. The scale yielded 3.97% in 30 years Thursday, matching 3.97% Wednesday.

Thursday’s triple-A muni scale in 10 years was at 88.0% of comparable Treasuries and 30-year munis were at 100.8%, according to MMD, while 30-year tax-exempt triple-A general obligation bonds were at 107.3% of the comparable London Interbank Offered Rate.

The yield environment also contributed to the Rector and Visitors of the University of Virginia’s $190 million competitive offering Wednesday crossing the 5% threshold, yielding 4.90% before accounting for the 35% federal subsidy. It yielded 3.19% after accounting for it.

“You are talking about a specialty state area, and this exemplifies those characteristics given that the fact you do have a scarcity of paper in Virginia,” said Howard Mackey, president of the broker-dealer division of Rice Financial Products. “From a BAB situation you might have a local appeal, with a high quality name in this market place. Virginia paper was still quiet attractive.”

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