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GovGovernmental bodies of all types are moving quickly to take advantage of the Build America Bond program that was created under the America Recovery and Reinvestment Act of 2009. According to chicagobusiness.com, more than $8 billion in BABs have been issued since the act was signed in mid-February.
BABs are taxable bonds which carry with them a 35 percent federal tax credit or subsidy. The issuer must be a governmental body authorized to issue bonds and the project must qualify for tax-exempt financing. Unlike tax-exempt bonds, however, 501(c)(3) agencies do not qualify.
According to Mary Kane, first vice president of Stifel, Nicolaus & Co. Inc., there has been a lot of interest from investors in buying BABs because the market is open to a much larger pool of investors than are able to purchase tax-exempt bonds. For example, banks are showing a great interest in BABs because they do not come under the "bank-qualified" cap that governs tax-exempt financings. And, BABs produce a much higher return on investment than tax-exempt bonds do.
"As big as we think the tax-exempt market is, it's really very small compared to the taxable market," Kane said. "This is an opportunity to bring all of these new investors into the marketplace and to make projects happen much quicker that they could otherwise."
Last month, Southern Illinois University issued $53.7 million in BABs and matched it with another $20.5 million in local funds to finance the construction of a new football stadium at SIU Carbondale and the expansion of the existing basketball arena.
Tina Galik, the assistant treasurer for SIU, says the university had originally planned to issue tax exempt bonds for the project but BABs turned out to be a better deal. After the tax credit, the effective interest rate came in at 3.84 percent. Galik says the university ended up saving $7.5 million in total debt service over a tax-exempt issue.
"You’re really reaching a broader market and getting a bigger variety of investors who right now are very interested in safe investments with a good return," Galik said.
According the U.S. Department of the Treasury, BABs can be used by state and local governments to fund a variety of capital projects such as public buildings, courthouses, schools, roads, transportation infrastructure, government hospitals, public safety facilities and equipment, water and sewer projects, environmental projects, energy projects, governmental housing project and public utilities.
So far, the issuers of BABs have been large governmental entities like the Illinois State Toll Highway Authority, the state of California, the New Jersey Turnpike Authority, the New York Port Authority and the New York Metropolitan Transit Association.
"The people who were able to pull them off right away were the very large organizations who had the skills in-house and the financial teams that were paying attention," said Kane.
She predicts, however, that smaller governments are going to jump on the BAB bandwagon soon because the window of opportunity is just through the end of 2010.
While the tax credit can either go to the buyer of the bonds or the issuer of the bonds, Kane says she has not seen a BAB issue sold yet with the bond buyer as the recipient. A benefit to the issuer recipient is that the subsidy can be used for any legal purpose. In the case of SIU, for example, the university will get a subsidy twice a year that can then be used to pay interest on the bonds - or it could be put into the education fund to pay salaries or cover other needed expenditures.
"It’s a real boon for the issuers like SIU because they get a lower overall cost of funds and the interest rate subsidy that they receive can be used for any other purpose," Kane said. "It’s not restricted to just paying interest. They can pay interest, of course, but they do not have to do that. They could put it in their general fund or use it for education purposes or projects, or whatever it is that they would deem appropriate."
Kane said BABs can also be used in conjunction with tax-exempt bonds, and that some issuers are issuing short term tax-exempt bonds and using BABs for the longer maturities.
The SIU stadium project in Carbondale is being built by Holland Construction Services of Swansea. Construction began in March 2009 and is expected to be completed by September 2010. |
