Tax Exempt Bonds Raised for Construction

By Jeremy R. Cooke

Nov. 16 (Bloomberg) -- U.S. state and local governments plan to sell the most fixed-rate bonds in almost seven months this week, including at least $2.5 billion of Build America Bonds and non-subsidized taxable issues.

New York’s Urban Development Corp. leads more than $12 billion in municipal borrowing plans, with a $1.5 billion sale of bonds backed by revenue from personal income taxes. Half of the offering may come in the form of taxable BABs, for which the U.S. government pays 35 percent of the interest expense under the Obama administration’s two-year economic stimulus.

The authorization to sell Build America Bonds, which have helped raise more than $51 billion for infrastructure and bring down long-term, tax-exempt borrowing costs, sunsets at the end of 2010. The program’s success so far may merit an extension, Obama’s nominee to be assistant secretary for tax policy at the Treasury, Michael Mundaca, said earlier this month.

“The future of the BAB program is the most important question facing the municipal bond market today,” John Dillon, a fixed-income strategist in Purchase, New York, for Morgan Stanley Smith Barney, the world’s largest retail brokerage, said in a Nov. 12 report. “The landscape could be permanently altered by an extension and/or expansion of the program.”

If the BAB program sunsets and municipal issuers have to rely more on tax-exempt issues to fund public works again, municipal bond yields may be dragged higher along with rates on Treasuries, Dillon said. If Congress allows Build America issues to continue past the end of next year, municipals may “significantly outperform” U.S. debt, he said.

20-Year Index Falls

The weekly Bond Buyer 20 index of benchmark 20-year yields has dropped 52 basis points, or hundredths of a percentage point, to 4.4 percent since the first public Build America offerings in mid-April.

A daily index of 10-year general obligation bond yields compiled by Municipal Market Advisors of Concord, Massachusetts, fell 1 basis point today to 3.14 percent, the lowest since Oct. 9.

The New York issuer, which also does business as Empire State Development Corp., is offering $775.6 million of Build America Bonds, $501.5 million of tax-exempt debt and $224.1 million of taxable notes without federal subsidies.

Individual investors can place orders today through banks led by Goldman Sachs Group Inc. Ten-year bonds were being offered with an estimated yield of 3.46 percent, traders said. Tomorrow, institutions such as mutual funds can buy the debt, rated AAA by Standard & Poor’s and AA- by Fitch Ratings.

Use of Proceeds

The proceeds will fund projects for state prisons, courts, public universities and police facilities; grants to local governments; and state agency equipment purchases. The deal also will help fund a computer-chip research and development center for Globalfoundries Inc., created by Advanced Micro Devices Inc. and the government of Abu Dhabi, Lisa Willner, an Empire State Development spokeswoman, said in an e-mail.

New York has twice previously sold Build America bonds backed by personal income tax revenue through the state’s Dormitory Authority. Taxable bonds set to pay 5.628 percent until March 2039 recently had a yield of 5.67 percent, JPMorgan Chase & Co. analysts said in a Nov. 14 note to clients. That was 131 basis points more than Treasuries and 40 basis points more than comparable corporate bonds, according to the note.

The last time municipal issuers sold more than $12 billion of fixed-rate bonds in a week was the one ended April 24, when a taxable California deal pushed the total to $15.4 billion, Bloomberg data show.

Following are descriptions of additional pending municipal- bond sales; the timing and amounts may change.

CALIFORNIA’S STATE PUBLIC WORKS BOARD intends to raise about $1.34 billion by selling federally subsidized taxable Build America Bonds and tax-exempt securities, all payable from state appropriations on Nov. 19. Banks led by Jefferies Group Inc. and Wells Fargo & Co. will underwrite the offering, the sixth of $1 billion or larger in the state since the beginning of October. The money raised will fund capital projects including work at San Quentin State Prison, veterans homes in Fresno and Redding and the J. Paul Leonard & Sutro Library at San Francisco State University. All of the bonds received ratings of BBB- from Fitch and A- from S&P. Moody’s Investors Service gave an A1 to the $162.7 million portion of the deal for the university library, and Baa2 to the rest. (Updated Nov. 16)

LOS ANGELES INTERNATIONAL AIRPORT, the third-busiest in the U.S. last year, is planning to sell as much as $1.3 billion of bonds beginning this week through banks including Barclays Plc, Morgan Stanley and Ramirez & Co. The sales, comprising taxable Build America and tax-exempt bonds, will cover construction costs and refinance as much as $610 million of debt subject to the federal alternative minimum tax. The two-year U.S. stimulus law passed in February allows airports to replace select recent issues of AMT debt with lower-cost, tax-exempt bonds. Only airports in Atlanta and Chicago handled more passengers than the facility known as LAX last year, according to Airports Council International. (Added Nov. 16)

AMERICAN MUNICIPAL POWER, a Columbus, Ohio-based supplier to public electric systems, intends to offer $600 million of bonds this week to refinance short-term notes and fund work on three hydroelectric generators on the Ohio River. Underwriters led by Bank of Montreal’s BMO Capital Markets GKST Inc. will handle the offering. It may include a mix of tax-exempt securities and taxable Build America Bonds, for which the federal government pays 35 percent of the interest cost. The bonds are secured by payments made under power sales contracts with municipal utilities in Ohio, Kentucky, Michigan, Virginia and West Virginia. (Updated Nov. 16)

PENNSYLVANIA TURNPIKE COMMISSION, operator of the state’s toll-road system, plans to sell $524.8 million of fixed-rate, tax-exempt bonds as soon as tomorrow through Morgan Stanley to replace variable-rate debt and make termination payments on associated interest-rate swaps. The bonds, backed by a senior lien on revenue from the Pennsylvania Turnpike, are rated A+ by Fitch and S&P. (Added Nov. 16)

LOS ANGELES DEPARTMENT OF WATER & POWER, the largest U.S. municipal utility, plans to raise $500 million for its water system by selling a mix of federally subsidized, taxable Build America Bonds and tax-exempt securities. Banks led by Citigroup Inc. and Siebert Brandford Shank & Co. are to underwrite the taxable series of bonds, and De La Rosa & Co. will handle the tax-exempt portion. The bonds, backed by revenue from a system that serves about 4.1 million residents in the city of Los Angeles, received ratings of AA from Fitch and S&P and Aa3 from Moody’s. (Added Nov. 12)

CHARLOTTE, NORTH CAROLINA, the state’s most populous city, plans to borrow $367 million for improvements to its water and sewer system and to pay off commercial paper. The tax-exempt revenue bonds, which underwriters led by Wells Fargo & Co.’s Wachovia Bank will market to investors this week, are rated Aa1 by Moody’s and AAA by S&P and Fitch. After the latest sale, Charlotte’s water and sewer system will have more than $1.5 billion in equivalent debt. (Added Nov. 12)

CHILDREN’S HEALTHCARE OF ATLANTA plans to refinance variable-rate debt by selling $302.2 million of fixed-rate, tax- exempt bonds as soon as this week through public authorities in DeKalb and Fulton counties and underwriters led by JPMorgan Chase & Co. Children’s is the only independent, freestanding pediatric hospital in Georgia’s most populous city, according to Moody’s. Its bonds are rated Aa2 by Moody’s and AA by S&P. After the latest deal, about 60 percent of Children’s $500 million in long-term debt will be fixed-rate bonds. The rest is variable and paired with interest-rate swaps, according to S&P. (Added Nov. 16)

UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL plans to sell $115 million of 30-year taxable Build America Bonds and $109 million of tax-exempt securities due from 2010 through 2029. Underwriters led by Bank of America Corp.’s Merrill Lynch & Co. will underwrite the offering as soon as tomorrow. The proceeds will pay off commercial paper and fund capital projects for utility infrastructure and facilities for athletics and research, Fitch said. The public university, which enrolls almost 29,000 students, is rated AA+ by Fitch and S&P and a comparable Aa1 by Moody’s. (Added Nov. 16)

NEW YORK, the third most-populous U.S. state after California and Texas, will take bids Nov. 23 from banks seeking to underwrite $351.3 million of tax-exempt general obligation bonds. The transaction will replace variable-rate debt with fixed-rate securities due from 2010 through 2030. The state, home to about 19.5 million people, carries ratings of AA- by Fitch, AA by S&P and Aa3 by Moody’s. Only about 7 percent of New York’s debt carries its general obligation pledge, Fitch said. The rest is secured by state appropriations or dedicated revenue streams. (Added Nov. 17)

To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net.
Last Updated: November 16, 2009 15:43 EST