Monona, Wisconsin, may be the first issuer in the $3.7 trillion municipal market to redeem its Build America Bonds at par value after sequestration last month curbed federal subsidies on the debt.
The city may buy back bonds issued in 2009 and 2010, Monona said in a notice. The community of about 7,700 residents is surrounded by the state capital of Madison. It would be the first local issuer to refinance the subsidized debt, said Bart Mosley, co-president at Trident Municipal Research in New York.
About $7.6 billion of Build America Bonds have provisions that put them most at risk for such calls after sequestration, the $85 billion in U.S. budget cuts that began March 1, curbed the subsidy, according to Tom Weyl, director of municipal research at Barclays Plc in New York. The promised 35 percent issuer benefit was lowered to about 32 percent as part of the federal spending reductions for fiscal 2013.
“Bondholders should look at what they own and compare what similarities there are that raise the risk of a call,” Mosley said by telephone. Deals such as Monona’s are “by far the exception,” he said.
The Monona debt has par-value call provisions that analysts, including Weyl and John Hallacy at Bank of America Merrill Lynch, said could mean repurchases at below-market prices because of the lower subsidies. The city has about $7.75 million of Build America Bonds outstanding, according to data compiled by Bloomberg.
Almost $188 billion of Build America Bonds have been issued since they were created in 2009 as part of President Barack Obama’s economic-stimulus plan, data compiled by Bloomberg show. Buyers flocked to the taxable securities, which offered higher yields to investors.
If Monona redeems the bonds, the city said it would pay 100 percent of their value, plus accrued interest, in the notice, posted on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website.
Monona plans to issue tax-exempt debt to finance the redemptions, as long as it can save on interest costs, Marc Houtakker, the city finance director, said by telephone.
The city’s longest-dated Build America Bond matures in 2019, Bloomberg data show. Monona debt maturing in October 2018 most recently traded on Feb. 20 at about 111 cents on the dollar to yield 2.3 percent.
The extra yield investors demanded to own Build America Bonds instead of 30-year U.S. Treasuries narrowed to a record 1.19 percentage points on March 20, Wells Fargo & Co. data show. The spread widened to 1.28 percentage points yesterday.
Build America Bonds have returned about 2.7 percent this year, Bank of America data show. That compares with 1.2 percent for the broad muni market, 0.4 percent for Treasuries and 1.1 percent for corporate securities, the data show.
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