Taxpayers Lose $328 Million in Build America Profits

(Bloomberg) -- State and local public finance officials from New Jersey to California rewarded investors with $328 million of instant profit by selling debt through the federal government’s Build America Bonds program.

That’s how much prices of the five biggest bonds have risen in total since the first sales almost three weeks ago, according to Municipal Securities Rulemaking Board price data compiled by Bloomberg. About $7.6 billion of the debt, whose interest costs are partly subsidized by the U.S. government, has been issued.

Local officials say the federal subsidy has saved money compared with tax-exempt bonds. The rising prices of the securities and simultaneous decline in yields relative to benchmark rates shows municipalities would have saved another $1.39 billion in interest over the life of the bonds had they sold at current levels. The yields on $1.38 billion of debt sold by the New Jersey Turnpike Authority tumbled to 6.69 percent from 7.41 percent within a day of its April 20 offering.

“Some of these may have been good deals for the issuers, but could they have been even better?” said Ben Watkins, Florida’s director of bond sales. “They could have had much tighter pricing.”

New Jersey Turnpike spokesman Joseph Orlando declined to comment, referring questions to Dennis Enright, the authority’s financial adviser. Enright, president of NW Capital in Jersey City, New Jersey, called the sale “very successful.”

Buyers Rewarded

California’s $3 billion of Build America Bonds sold April 20 and due in 2039 rose 2.6 percent, rewarding buyers with $78 million of profits and pushing down yields to 7.22 percent from 7.43 percent, Bloomberg data show. The state’s $2 billion of 25- year debt climbed 2.1 percent, or $42 million.

The New York Metropolitan Transportation Authority’s $750 million of debt, issued the same day, surged 8.6 cents on the dollar, driving the yield down to 6.67 percent from 7.34 percent.

Build America Bonds are part of President Barack Obama’s American Recovery and Reinvestment Act passed earlier this year to create jobs building roads, schools and infrastructure. The government pays a 35 percent subsidy on the interest rates that can cut coupons below those in the tax-exempt market.

The bonds are exempt from local taxes in the state of issue, though not from federal taxes. Strategists at Barclays Capital in New York predict that the market may grow to as much as $150 billion over the next two years.

Relative Yields

Sacramento Municipal Utility District today began offering $200 million of Build America Bonds due in 2036 to finance improvements to its electric system, according to a person familiar with the offering who declined to be identified because terms aren’t set. The debt may yield 225 basis points to 250 basis points more than Treasuries of similar maturity.

Investors are snapping up Build America Bonds because they offer the same yields as companies with lower ratings.

The New York Metropolitan Transportation Authority, ranked AA by Standard & Poor’s, paid 7.336 percent interest for its 30- year Build America Bonds. At the same time, corporate bonds with the same maturity and rating yielded 6.1 percent to 6.19 percent, according to a Moody’s index. MTA bonds paid a yield higher than the 6.78 percent average for companies with A ratings from Moody’s, index data show.

The best opportunity for investors “is to get involved early” because “that’s where you’re going to get the cheap offerings,” said Scott Minerd, chief executive officer of New York-based Guggenheim Partners Asset Management Inc., which oversees about $30 billion. Minerd made the comments at the Milken Institute Global Conference in Beverly Hills, California, last week.

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