(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) – 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) – 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.

(Reuters) – Less than 1 percent of the subsidy payments owed to city, state and local governments for the Build America Bonds stimulus program have been withheld, according to the U.S. Treasury Department.

“Despite over $120 billion of BABs issuance to date, hardly any payments have been offset,” said Assistant Secretary for Economic Policy Alan Krueger in a speech to be given to the National Association of State Treasurers.

“Only .05 percent of total BABs subsidy payments requested by states have been offset because of outstanding tax debts owed to the IRS,” he said.

The taxable bonds, created as part of last year’s economic stimulus plan, pay issuers a federal rebate of 35 percent of interest costs. Lured by such a steep subsidy, issuers have brought more than $120 billion to market since the first BABs sale in the spring of 2009. But recently some states, notably Florida, have raised concerns about federal offsets.

The payments are treated as tax refunds, which means that the federal government checks if a state owes it money and then deducts that amount from the refund. According to Krueger of the total $626.45 million in BABs subsidy payments issuers have requested, some $626.15 million has been paid.

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(Bloomberg) – Build America Bonds, the fastest- growing part of the $2.8 trillion municipal debt market, will cost the federal government $36 billion through 2019, $6 billion more than forecast, the Congressional Budget Office said.

The U.S. subsidizes 35 percent of the interest cost of the taxable Build America securities, which were authorized under the economic stimulus legislation signed by President Barack Obama last year. Issuers have sold about $128.5 billion of the debt, according to data compiled by Bloomberg.

Federal spending on Build Americas will rise to $2 billion for the 2010 fiscal year ending Sept. 30, from less than $500 million in 2009, the non-partisan agency said yesterday in its semi-annual budget report. From 2009 to 2019, the total cost will grow to $36 billion, up from a $30 billion estimate in January. The Bond Buyer newspaper reported the findings earlier.

According to the CBO’s March analysis of Obama’s fiscal 2011 budget, his plan to expand and permanently extend the program — as well as lower the subsidy to 28 percent — would increase revenue by $80 billion over the 2011-2020 period. More than two-thirds of the Build America program’s cost is currently offset by higher tax revenue, according to the CBO.

The House of Representatives postponed on July 29 a vote to extend the Build America program for two years beyond its Dec. 31 expiration. Two previous extensions sought by the House were killed in the Senate.

Independent researcher CreditSights Inc. forecast on July 29 that total issuance would reach $165 billion by year-end, as borrowers come to market before the program is set to cease.

Build Americas yield about 5.63 percent on average, according to the Wells Fargo Build America Bond index. The index has an average maturity of 28.8 years and an average credit rating of Aa3 and AA- from Moody’s and S&P, respectively. Both ratings are the fourth-highest investment grades.
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(Bond Buyer) – The Congressional Budget Office Thursday upped the estimated cost of the Build America Bond program by $10 billion to $36 billion over 10 years in its new estimates on the fiscal 2010 budget deficit and economic outlook.

The BAB cost estimate eclipsed the CBO’s $26 billion 10-year estimate released in January. The estimate applies only to the current BAB program set to expire at the end of the year, and does not account for any proposals to extend it at a lower subsidy rate.

Legislation is currently pending in the House that would extend BABs for two years while gradually lowering the subsidy rate from the current 35% level to 30%.

The CBO noted the cost of making direct-subsidy payments to BAB issuers is “more than two-thirds” offset by higher tax revenues reaped by the taxable bonds. In its March analysis of President Obama’s fiscal 2011 budget, the CBO said extending BABs at a 28% reduced subsidy would increase outlays by $88 billion from 2011 through 2020.

But the net cost to taxpayers would be $8 billion, thanks to $80 billion in increased tax revenue generated by BABs. The program cost the government less than $500 million in 2009 and is expected to cost $2 billion for 2010, the CBO said. State and local governments have issued $125.6 billion of the bonds through Wednesday.

The CBO’s current BAB estimate is included in its updated cost estimates for the American Recovery and Reinvestment Act. The stimulus law is now expected to add $392 billion to the deficit in 2010 and $814 billion through 2019 — $48 billion less than the agency’s January estimate on the 10-year ARRA cost.

The CBO also revised lower its total deficit estimate for fiscal 2010 to 9.1% of gross domestic product from the 9.2% estimated in January. The federal government had a 9.9% deficit-to-GDP ratio in fiscal 2009, the largest since World War II. The total debt held by the public for fiscal 2010 was revised higher to $61.6 billion from $60.3 billion.

The CBO’s estimate assumes that the tax cuts signed by President George W. Bush in 2001 and 2003, plus tax cuts enacted as part of ARRA, will expire at the end of the year. As a result, the office expects the deficit-to-GDP ratio will shrink to 2.5% by 2014. Obama has proposed extending the tax cuts except for the two highest tax brackets, which are slated to return to 36% and 39.6% in 2011.

On the economy, the CBO revised higher its estimate for fiscal 2010 real GDP growth to 3.0% from its 2.2% January estimate. Real GDP in 2011 was revised higher to 2.1% from 1.9%. The office expects the unemployment rate to average 9.5% for the year and to decline to 9.0% next year.

The Federal Reserve will not begin to raise interest rates until early 2012, the CBO estimates. It added that since the Fed “has never conducted monetary policy with such large holdings of assets and liabilities, it might have some operational difficultly in calibrating the removal of that stimulus.”

The 10-year Treasury note will have an average yield of 3.4% for 2010 and will increase to 3.5% for 2011, the CBO said. Net interest the government will pay on debt held by the public was revised higher to $202 billion in 2010 from $187 billion in 2009.

The increase stems from higher inflation this year, which will add to the cost of the Treasury Department’s inflation-protected securities as well as the sharply higher level of debt issued this year.

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