Build America Bonds

Build America Bonds

April 10, 2010

Build America bonds now constitute more than 20% of the municipal bond market, the US Treasury Department said in April.

The bonds are taxable bonds issued by state and local governments to build schools, roads, hospitals and other public facilities. However, unlike the tax-exempt debt that governments usually use to finance such facilities, lenders who buy Build America Bonds pay taxes on the interest they receive, but claim tax credits for 35% of the interest. State and local governments issuing bonds in 2009 or 2010 have the option to receive the value of the tax credits in cash instead of allowing the bondholders to claim credits.

The Treasury said $90 billion in Build America Bonds were issued through March 2010 in 1,066 separate bond issues.

It said that issuers save on interest costs by borrowing with Build America Bonds rather than tax-exempt debt at virtually all maturities. The savings are 31 basis points for a 10-year bond and 112 basis points for a 30-year bond. That’s because Build America Bonds appeal to a broader class of investors, including pension funds, foreign investors and insurance companies that have little incentive to purchase tax-exempt debt.

The authority to issue the new bonds expires at the end of 2010. Congress is expected to extend the program, but at a 28% subsidy rate rather than 35%.

Keith Martin