(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) – 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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(The Bond Buyer) – A draft bill released by House Ways and Means Committee chairman Sander Levin late Monday would authorize over $5 billion in new bond authority for renewable energy projects and open the door for private-activity bonds to be used by states and localities to finance energy-efficient upgrades to residential homes.

The bill does not include highly sought extensions of several high-profile bond programs that were authorized by the American Recovery and Reinvestment Act — including Build America Bonds.

But that’s no reason to panic, according to sources and market participants, who remain optimistic that lawmakers will take another crack at legislation extending BABs and other expiring tax-law provisions during the coming weeks.

BABs were excluded from the energy bill primarily because they are not energy-related, a congressional source said.

The House had approved a two-year extension for BABs in jobs legislation it passed last month. But the BABs and other bond program and tax law extensions were carved out of the legislation after lawmakers in the Senate failed to garner enough votes to limit debate and avoid a filibuster. President Obama signed the much narrower bill last week.

The draft Domestic Manufacturing and Energy Jobs Act of 2010 unveiled by Levin would authorize an additional $3.5 billion of clean renewable energy bonds, 60% of which would be allocated to public power providers with the remaining 40% going to rural electric cooperatives.

It also would expand the use of CREBs to include energy storage systems and certain biogas equipment. CREBs can be issued as either tax-credit bonds or direct-pay bonds like BABs.

In the direct-pay mode, issuers would receive subsidy payments equal to 70% of interest costs.

The Joint Tax Committee estimated the CREBs provision would cost $1.391 billion over 10 years.

The Levin draft legislation also would authorize $2.4 billion of a new type of tax-credit bond — home energy conservation bonds — that the Treasury Department would allocate to state and local governments.

The bonds could be used to finance residential energy-efficiency assistance programs, provided at least 20% of the proceeds are used to make low-income energy efficiency assistance grants and loans, and at least 10% are used to make “very low-income residential energy efficiency assistance grants,” according to the legislative text.

Like CREBs, issuers would have the option of issuing the bonds as tax-credit or direct-pay bonds.

The provision is estimated to cost $1.252 billion over 10 years.

The legislation also would allow states and localities to issue private-activity bonds to finance homeowner energy-efficiency upgrades and retrofits as part of a property assessed clean-energy program.

The PACE programs have been adopted by 21 states and the District of Columbia. Under the programs, tax-exempt bond proceeds are used to finance the “green” upgrades and are eventually paid back by homeowners via a special assessment on their property taxes.

The provision is estimated to cost $730 million over 10 years by the Joint Tax Ccommittee.

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(The Bond Buyer) – Military housing bond issuers should keep an eye on Build America Bonds as likely competition as they attempt to reclaim a spot in the bond market — and the military may have a need for $25 billion of new housing debt in the future, panelists said yesterday at The Bond Buyer’s Fifth Annual Financing Military Housing Privatization Conference.

“If we can ever figure out how to privatize unaccompanied housing — that is, the barracks — that would be another $25 billion of financing needs,” said Bob Helwig, deputy director for housing in the housing and competitive services directorate of the Office of the Secretary of Defense.

The Pentagon has awarded a total of 99 projects as part of its housing privatization program as of January.

About 43% of base housing, or 58,000 units, are “old and in need of extensive repair,” according to the Defense Department’s military housing privatization website. In addition, there is a desire to issue more debt for additional housing at existing projects, such as at Camp Lejeune, N.C., said Antony Elkins, executive vice president and chief commercial officer of Lend Lease Americas, a developer on the projects.

Actus Lend Lease is the developer on Camp Lejeune housing projects. Its portfolio of privatization projects includes 8,059 homes in Atlantic Marine Corps communities.

But panelists who buy and rate the bonds said issuers need to make some changes if they want military housing to successfully compete with more popular paper, including BABs.

While BAB deals have rapidly grown to $4 billion or $5 billion in new deals per week, military housing deals are sluggish at best, panelists noted.

Investors that seek long-term bonds are now being served by the BAB market, said James Robinson, director of municipal sales at Barclays Capital, who noted that there was only one bidder for a military housing bond deal that came to market this week.

To pick up the slow-going market, the panelists suggested ways for market participants to make the bonds more appetizing to buyers.

“We would like to see this asset class resurrect and get to a point where we feel comfortable investing our dollars,” said Frank Monfalcone, director at Metropolitan Life Insurance Co.

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(The Bond Buyer) – Household ownership of municipal bonds catapulted over the $1 trillion mark for the first time ever in the first quarter of 2010. Meanwhile, foreign investors seeking a greater footprint in the municipal market via taxable Build America Bonds held $71.9 billion in their largest-ever presence in the market, according to new Federal Reserve data released yesterday.

Households held $1.02 trillion — roughly 35% — of the $2.834 trillion in outstanding municipal debt through the end of the quarter that ended March 31. Although households only increased their assets by 2.1%, or $21.3 billion, from $998.9 billion they held at the end of the fourth quarter of 2009, the latest milestone pushed the sector closer to doubling the $531.2 billion it owned in 2000.

Foreign buyers — enticed by the abundance of high-yielding taxable BABs — increased their holdings 18.8% to $71.9 billion from $60.6 billion in the fourth quarter of 2009. It was a jump of 79.9% — or $31.9 billion — compared to their holdings at the end of the first quarter of 2009 and nearly 10 times the amount of muni debt they held in 2000, well before Congress created BABs as part of the American Recovery and Reinvestment Act in 2009.

“We are not surprised by the greater foreign participation in the municipal market as the Build America Bond program continues to find institutional demand from overseas investors looking for additional yield without substantial amounts of credit risk,” said Michael Pietronico, chief executive officer at Miller Tabak Asset Management in New York City.

“The trend continues to be positive overall for investor participation to broaden out globally for BABs” going forward, he said.

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(Bloomberg) – International investors boosted their holdings of U.S. municipal debt by about 19 percent last quarter from the end of 2009, to $71.9 billion, according to data from the Federal Reserve.

Buyers categorized as being from the “rest of the world” have more than tripled their holdings of state and local government obligations since 2003, according to the Fed figures released today.

The pace of growth accelerated last year with the introduction of taxable Build America Bonds, according to Philip Fang of New York-based Invesco PowerShares Capital LLC, who manages an exchange-traded fund that invests primarily in the federally subsidized securities.

About $110 billion of Build America Bonds have been sold since their creation by the economic stimulus program in February 2009, according to data compiled by Bloomberg.

Households, the largest single investor group in state and local government debt, added 2.1 percent in the quarter to $1.02 trillion, the Fed said.

“Definitely the popularity has increased,” said Philip Fang, who manages an exchange-traded fund that invests primarily in Build Americas at New York-based Invesco Powershares Capital LLC. The bonds, whose interest cost is subsidized by the federal government, are “a very liquid market,” said Fang. “I don’t see why this new set of buyers would overlook the asset class.”

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(Bloomberg) – San Francisco’s Public Utilities Commission, the third-largest municipal utility in California, offered more than $417 million in Build America Bonds, with the yield premium over Treasuries close to the widest in six months.

Investors in taxable, 30-year Build Americas demanded an of 165 basis points, or 1.65 percentage points, of extra yield on average relative to comparable-maturity Treasuries yesterday, according to data compiled by Bloomberg. The so-called spread has widened 19 basis points since May 3.

San Francisco pumps water more than 180 miles (290 kilometers) from Yosemite National Park to supply 2.4 million customers in the Bay Area. The bonds, backed by water-system revenue, are rated Aa2 by Moody’s Investors Service and AA- by Standard & Poor’s, third- and fourth-highest. The utility paid investors 189 basis points more than 30-year Treasuries for debt maturing in 2040.

The spread has grown because “we read every day about issues within municipalities that raises concern for investors, especially those who haven’t been in the muni market traditionally, like a lot of Build America investors,” said Ashton Goodfield, who helps oversee $29 billion at Deutsche Asset Management in Boston. “There’s also added supply this week, and over the past month, we’ve had a rally in Treasuries; you can’t point to one factor.”

Municipalities including New York, Cleveland and Austin, Texas, are scheduled to sell $2.7 billion in Build Americas this week, bringing total issuance to more than $110 billion, according to Bloomberg data. Issuers are eligible for a 35 percent subsidy of their interest costs from the U.S. Treasury.

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