Build America Bonds
Build America Bonds are taxable municipal bonds that carry special tax credits and federal subsidies for either the bond issuer or the bondholder. Build America Bonds were created under Section 1531 of Title I of Division B of the American Recovery and Reinvestment Act that U.S. President Barack Obama signed into law on February 17, 2009. The program expired December 31, 2010.
Purpose of and eligibility for Build America Bonds
The purpose of Build America Bonds is to reduce the cost of borrowing for state and local government issuers and governmental agencies. Some traditionally tax-exempt issuers, such as private party issuers and 501(c)(3) organizations, are not eligible to use the Build America Bond program. Currently, the program is only open to new issue capital expenditure bonds issued before January 1, 2011.
Build America Bonds can provide states and localities with substantial savings on their borrowing costs. According to the United States Department of the Treasury, the savings for a 10 year bond are estimated to be 31 basis points and the savings for a 30 year bond are estimated to be 112 basis points versus traditional tax-exempt financing.
Types of Build America Bonds
There are two types of Build America Bonds (often abbreviated as BABs): "Tax Credit BABs" and "Direct Payment BABs." The Direct Payment BABs provide a federal subsidy of 35% of the interest paid on the bonds to the issuer. The Tax Credit BABs provides a federal subsidy as a refundable tax credit directly to the bondholders. While the bondholder is the recipient of the tax credit through Tax Credit BABs, and the bond issuer is the recipient of the tax subsidy through Direct Payment BABs, both options reduce the cost of borrowing for the bond issuer in comparison to traditional taxable corporate bonds, and in many cases, it is more cost effective than issuing traditional tax-exempt bonds.
While Build America Bonds are taxable fixed income securities, the biggest holders include both traditional and non-traditional municipal bond holders. The largest buyers include insurance companies, mutual funds, foreign central banks, and foreign commercial banks.
From the time of the program's inception in April 2009, through the end of the program at the end of 2010, a total of US$181 billion of Build America Bonds were issued.
- DerivActiv MuniMarket Pulse. "Mier of Loop Capital Says an Issuer 'Can Get Access to All These New Buyers by Going Taxable'" Retrieved on May 23, 2009
- Internal Revenue Service. "IRS Issues Guidance on New Build America Bonds" Retrieved on May 23, 2009.
- States to lose Build America Bonds program in 2011 Retrieved on January 17, 2011
- Miller, Canfield, Paddock and Stone, P.L.C. "Build America Bonds" Retrieved on May 23, 2009.
- Rios, Rosie (2010-01-22). "The Recovery Act at Work: Build America Bonds". Washington, DC: United States Department of the Treasury. p. 5. Retrieved 2010-08-03.
- Internal Revenue Service. "Notice 2009-26, Part III: Build America Bonds and Direct Payment Subsidy Implementation" Retrieved on May 31, 2009.
- DerivActiv MuniMarket Pulse. "Decker of the Regional Bond Dealer Association Explains the Provisions of the Stimulus Package that Affect the Muni Market" Retrieved on May 31, 2009.
- Rosenberg, Stan. "Flow of Build America Bonds Starts Strong" Wall Street Journal. April 29, 2009. Retrieved on May 31, 2009.
- "Treasury Recovery Act - Build America Bonds Data" (Press release). United States Department of the Treasury. 2010-12-06. Retrieved 2010-12-17.