Build America Bond Savings Fall as San Diego Water Plans Deal
By: Jeremy R. Cooke

Build America Bonds are providing less average savings over benchmark tax-exempt borrowing costs than they were three months ago, prompting at least two public issuers to forgo taxable offerings.

Miami-Dade County, which raised $600 million for its airport, the largest U.S. gateway to Latin America, scrapped plans to sell as much as 30 percent of the issue as federally subsidized Build America debt. Ohio’s Water Development Authority, which also considered issuing Build America Bonds, instead sold only tax-exempt securities in its $366 million deal to finance low-cost loans for water projects around the seventh- most populous state.

The San Diego County Water Authority, this week’s largest municipal issuer in California, wants to sell about $537 million of so-called BABs and $102 million of tax-free debt, preliminary offering documents show. The final mix “will be determined by the relative position” of market yields for each type of security, said Eric Sandler, finance director for the wholesale water utility, which serves 3 million people.

Tax-exempt bonds have gained 1.3 percent since mid-October while Build America debt fell 0.7 percent, BofA Merrill Lynch total-return indexes show, as investors anticipated sales through the U.S. subsidy program will grow this year. State and local issuers get 35 percent rebates on their taxable interest costs under the stimulus initiative enacted in February 2009.

“The after-subsidy yield advantage in the BAB market has continued to decline, as the muni market continued to perform well in recent months relative to Treasuries, and BAB spreads to Treasuries remained relatively constant,” George Friedlander, municipal strategist at Morgan Stanley Smith Barney in New York, said in a Jan. 15 report. Spreads measure the yield difference between types of debt.

Average Yield

The average yield on the Wells Fargo Build America Bond Index ended last week at 6.175 percent, which translates to about 4.014 percent after the subsidy from the U.S. Treasury.

The post-subsidy cost was 46 basis points less than a Bloomberg Fair Value index of top-rated, 30-year tax-exempt bonds, compared with 73 basis points on Oct. 20. A basis point is 0.01 percentage point.

Tax-exempt yields on AAA general obligations due in 10 years increased by 1 basis point to 3.08 percent yesterday, according to a daily survey by Municipal Market Advisors of Concord, Massachusetts.

The Ohio authority had considered selling as much as $45 million of its deal as Build America Bonds, Chief Operating Officer Scott Campbell said in an interview yesterday.

Tax-Exempt Costs
To maximize savings over tax-exempt costs, the issuer would have had to offer taxable securities due in 15 to 20 years without a par call, Campbell said. Adding such an option, which typically raises yields, allows the issuer to buy back the debt at face value for refinancing in 10 years.

“We weren’t willing to give up the 10-year par call, and the savings level just wasn’t there,” he said.

The authority didn’t want to sell debt maturing in more than 20 years with its latest issue.

“If we would have been willing to go out 30 years, there might’ve been more savings available to us,” Campbell said. “That’s really where the savings is in the BABs market.”

Carter Hammer, Miami-Dade County’s finance director, said on Dec. 17 that as much as 30 percent of last week’s airport financing might be sold as Build America Bonds. Hammer didn’t respond to messages left for him yesterday.

Banks led by Citigroup Inc. and Barclays Plc were selected to market the San Diego County water revenue securities. The debt carries Standard & Poor’s second-highest AA+ credit grade, Fitch Ratings’ third-highest AA and Moody’s Investors Service’s fourth-highest Aa3.

The proceeds will refinance about $51 million of certificates issued in 1998 and raise money for new system improvements. Build America Bonds that receive the 35 percent federal cash subsidy can’t be used for refinancing.

Following are descriptions of additional pending sales of municipal debt in the U.S.

ORLANDO UTILITIES COMMISSION, Florida’s second-largest public power provider by customers after JEA, plans to sell $200 million of Build America Bonds to help finance generation and water projects. A group of banks led by Goldman Sachs Group Inc. will market the issue to investors tomorrow, Chief Financial Officer John Heard said. The utility system revenue bonds, with a final maturity in 2040, are rated Aa1 by Moody’s and AA by S&P and Fitch. (Added Jan. 20)

CLARK COUNTY, NEVADA, owner of the seventh-busiest airport in the U.S. by passenger traffic, plans to sell $800 million of tax-exempt bonds this week through underwriters led by Citigroup to help fund construction of a new terminal. Work on the $2.4 billion Terminal 3 at McCarran International Airport in Las Vegas, set for a mid-2012 opening, is more than half done, officials said in a release last week. (Updated Jan. 20)

NORTHEAST GEORGIA HEALTH SYSTEM plans to sell about $570 million of tax-exempt, fixed-rate securities through the Hall County and Gainesville Hospital Authority and underwriters led by BofA Merrill Lynch as soon as today. The Gainesville-based health-care group with the majority market share in Hall County wants to refinance variable-rate debt and cover the cost of canceling associated swap contracts. The health system’s debt will be 92 percent fixed-rate and 8 percent variable after the latest transaction, according to Fitch. About $320 million of the bonds are rated A- by S&P and A by Fitch. The companies assign A+ grades to the remainder, which has support of county property tax collections in addition to hospital revenue. (Updated Jan. 20)

LOUISIANA’S WOMAN’S HOSPITAL, a nonprofit facility devoted to caring for women and infants in the state capital of Baton Rouge, plans to borrow about $344 million by selling tax-exempt bonds through a state financing arm this week. The proceeds from the sale, underwritten by BofA Merrill Lynch, will help fund construction of a five-story replacement hospital and a medical office building. The debt will be issued by the Louisiana Local Government Environmental Facilities and Community Development Authority. Moody’s rates the offering A3, and S&P assigns it BBB+. (Updated Jan. 19)

NEW YORK STATE ENVIRONMENTAL FACILITIES CORP. plans to raise $327 million to provide loans for New York City water infrastructure projects by selling a mix of tax-exempt debt and taxable Build America Bonds as soon as this month. The subordinate notes, backed by loan repayments by the city’s Municipal Water Finance Authority, are rated Aa1 by Moody’s and AA+ by S&P and Fitch. Underwriters led by Siebert Brandford Shank & Co. will underwrite the deal. (Updated Jan. 20)

PRINCETON UNIVERSITY, the Ivy League school in New Jersey, intends to fund campus construction and renovation with the proceeds from a $250 million tax-exempt bond sale by New Jersey’s Educational Facilities Authority. Investment banks will place interest-cost bids today to underwrite the debt, which will mature from 2012 through 2040. The securities carry top ratings from S&P and Moody’s. Princeton will have $2.75 billion in debt after the latest financing, S&P said. (Updated Jan. 20)

FLORIDA, the fourth-most-populous state, will take interest-cost bids from investment banks seeking to underwrite $205.8 million of taxable Build America Bonds due in 9 to 29 years and $44.2 million of tax-exempt securities set to mature through 2018. Finance officials will provide 18 hours’ notice before the sale, which may occur as soon as this week. The debt, to finance capital spending on schools, will be repaid primarily from gross receipts taxes on utility services and also carry Florida’s general obligation repayment pledge. (Updated Jan. 20)

NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY, which helps fund improvements to the water and sewer system of the nation’s most populous city, plans to sell $400 million of Build America Bonds on Jan. 26. Underwriters led by Ramirez & Co. will market the debt, rated AA+ by S&P, Aa3 by Moody’s and AA by Fitch. (Added Jan. 15)