Monday, December 13th, 2010 - 6:30
Sunday, December 12, 2010 - 20:30
For cash-strapped states, local governments and other municipal issuers, Build America Bonds provided a welcome capital infusion. The outgoing editor of The Bond Buyer gives insights into their impact.
For the last several weeks, the question of whether Build America Bonds would continue to be issued has been about as predictable as the chances that your plane will land on time. Although the Obama administration has wanted to continue their use, new issuance of the taxable bonds is set to end on a December 31, 2010 deadline.
As of Friday, after much back and forthing, it appeared like the chances of an extension of these taxable bonds was low. The feds pay 35 percent of the interest charges on this instruments which made them quickly popular with municipal issuers. With chances of a reprieve slim, it seemed like a good time to talk with Amy Resnick, the editor-in-chief of The Bond Buyer about the impact that this part of the stimulus package has had. (We caught Resnick – photo at left -- on her last day at The Bond Buyer, the 120-year-old news daily of the public finance market. After ten years in the editor’s chair, she is leaving to become Americas’ editor of the Thomson-Reuters International Financing Review, a job she’ll start in early January.)
Q. Have there been big misconceptions about Build America Bonds (BABs) among the general press or public?
Resnick: I saw one story this week that the Build America bond program will stop after December 31st. It will stop in terms of there being new debt. But there will be bonds outstanding for decades. They’ll be around until they mature or are refunded. They don’t disappear.
Q. What are the major impacts you’ve seen from the two-year experiment with federally-subsidized taxable municipal bonds?
Resnick: I think probably it raised the profile of the municipal market. People who never thought about Munis before had a reason to think about them and invest in them. European and other pension funds never would have thought about the Muni market because they have no U.S. tax exposure to protect against. But Build America Bonds changed that. We were looking at the Barclay’s Capital U.S. Long Credit Index, which is one of the indexes that fixed income money managers benchmark against. Last July, almost 10 percent of the bonds in that index were municipals. They had never been in there before.
Q. How much of an economic impact did they have?
Resnick: Issuers borrowed nearly $200 billion through this mechanism. I’m not an economist. I don’t know the multiplier effect. But if you figure that each of those dollars were put to work building something or paying a bill, that’s a lot of impact. We had an awards dinner last night. One of the speakers talked about Build America Bonds being used for a small hospital in the Upper Peninsula of Michigan. That’s Michigan in 2010. Replacing a 50-year-old hospital probably wouldn’t have happened otherwise. That’s meaningful.
Anecdotally, there was a lot of economic activity created by these bonds.
Q. Do we know what the cost of this program has been to the federal government?
Resnick: There have been all kinds of estimates. But it’s not clear. Once bonds are sold, you’re always estimating. You don’t know how long they’ll be outstanding and some might have variable rates. At the beginning they didn’t know how successful the program would be. Just as a comparison, there was a proposal for extending the BABS at a 32 percent subsidy and the cost over ten years was estimated at $2.682 billion.
Q. What lessons could be learned from the experience with BABS?
Resnick: I think the aftermath provides some lessons. If you think about investors, you said to the world, ‘We’ve set up this thing to attract your attention. Now that we’ve got your attention, we’re cancelling it.’ That makes these bonds an orphaned asset class. There won’t be any more of them and that raises liquidity problems. Anyone who is managing money has to do due diligence and do research on the assets that they own. But do you want to keep someone on your staff or have an expert in something that, once it matures, no one will need to know about? How many people do you need who are experts in typewriter maintenance?
[If this is tried again], it’s not something that investors will likely come back to.
Markets like certainty. The uncertainty now is about the kind of liquidity there will be for the assets. You know that there is a worldwide market for a Treasury bond. If you want to sell it tomorrow or ten years from tomorrow, you’ll be able to get your money out easily and quickly.
Q. What were the major objections to the BABS?
Resnick: I think the objection stems from the fact that the subsidy didn’t get used equally across the country. We’ve looked at the breakdown of where geographically more BABS were sold. It was very concentrated. At the end of November, issuers in four states accounted for almost half of what had been sold up to that point: California, New York, Texas and Illinois.