While US President Barack Obama criticised Wall Street bonuses, his stimulus plan offers bankers the opportunity to boost fees with incentives that may lead to $65 billion in municipal bond sales.
School districts and local borrowers from Pennsylvania to California have already sold $400 million of tax-exempt bonds since February 17 under revised rules in Obama’s stimulus package, signed last week, according to data compiled by Bloomberg. Municipal Market Advisors, a Concord, Massachusetts-based research firm, estimates the new measures may drive more than $65 billion in new bond sales through 2010.
Banks that advise state and local governments and market their debt may collect $314 million in fees as a result of the sales, based on Bloomberg data. Municipal bond offerings, which totalled $392 billion last year, may expand as underwriters urge clients to take advantage of the stimulus tax breaks.
“Bankers can make the argument to their issuers that it’s good now to accelerate multiyear borrowing plans into issues this year and next year,” said Matt Fabian, managing director at Municipal Market Advisors.
Local governments paid about $1.9 billion to underwriters in 2008, according to Thomson Reuters and Bloomberg data. The fees provided support as financial companies suffered credit losses and writedowns totalling $1.1 trillion and dragged the global economy into a recession.
‘Shameful’ bonuses
Obama, 47, called bonuses at banks getting taxpayer-funded bailouts “shameful” on February 4, while proposing a $500,000 annual pay cap on some bankers who receive US bailouts.
The stimulus law promotes municipal bonds by removing the alternative minimum tax, or AMT, penalty from debt sold to fund private activities such as airport runways and student loans.
It also increases the size of bond issues qualified for tax exemptions when bought by commercial banks.
Obama spokeswoman Jen Psaki said there is a difference between “excessive compensation for Wall Street CEOs” and the benefits that the stimulus program may provide.
The president “believes that giving a break to middle class families currently paying additional taxes under AMT, providing essential help to cities and towns, school districts and vital public services across the country and freeing up the markets so that we can return to fiscal solvency are essential steps to getting our economy back on track.” Psaki said.
The Phoenixville Area School District, located in Philadelphia’s suburbs, sold $13.5 million of so-called bank- qualified bonds with fixed interest rates February 19. A unit of Zurich-based UBS AG was the winning bidder at an auction to decide underwriters, with an interest cost of 3.91 per cent.
Variable-rate refinancing
The deal refinanced variable-rate debt that cost the district as much as 4 per cent and will save more than $200,000 next year, said Bill Gretton, acting business administrator.
The South Bay Union School District, on the Pacific coast near California’s southern border, sold $16 million of bank- qualified bonds approved by voters in November to fund improvements and repairs at seven schools. The borrowing cost of 5.29 per cent compared with estimates of 5.5 per cent, said Scott Buxbaum, assistant superintendent of business services.
Yields on 30-year general obligation bonds rated A+ like the South Bay debt fell to 5.22 per cent last week from last year’s high of 6.32 per cent, a Bloomberg index shows. The yield still represented about 142 per cent of taxable 30-year Treasury bond rates, compared with a 10-year average of 100 per cent.
A total of $24 billion of the municipal bonds sold last year were subject to the alternative minimum tax and $15 billion offered tax breaks for commercial bank investors, representing 6 percent and 4 percent, respectively, according to Thomson data.
Bank Incentives
Banks were given tax incentives to invest in municipal bonds under 1986 rules aimed at helping issuers who sold no more than $10 million in bonds a year. The stimulus lifted the limit to $30 million for 2009 and 2010. At least 22 issuers have taken advantage of the new provisions, Bloomberg data shows.
The stimulus law will also help McCarran International Airport in Las Vegas and other issuers of so-called private- activity bonds because one of the provisions allows borrowers to refinance debt issued from 2004 through 2008 in addition to borrowing for new projects through 2010.
McCarran will be able to sell tax-exempt bonds when the Clark County, Nevada-owned facility refinances $400 million of one-year notes subject to the AMT, due July 1, 2009.
Las Vegas Airport
“Without this fix, McCarran would be at a disadvantage trying to sell its bonds because the interest would not qualify for this AMT relief,” said Jon Summers, spokesman for Senate Majority Leader Harry Reid of Nevada, one of the Democrats who championed the measure.
The AMT was created in 1969 to prevent 155 wealthy Americans from avoiding any tax by claiming excessive deductions, credits, and exemptions. The measure now affects about 4 million households, prompting Congress to pass annual patches that index the levy to inflation.
Interest from most municipal bonds isn’t counted toward income when calculating the AMT, except for private-activity bonds. The new exemption applies to bonds issued through 2010.
The Metropolitan Washington Airports Authority, which operates Dulles International and Reagan National airports, plans to sell $400 million of bonds as soon as next month that previously would have been subject to the AMT.
“We expect a lower interest rate,” said Lynn Hampton, authority chief financial officer.
Thirty-year, tax-exempt bonds to fund transportation and rated A+ yield about 0.9 percentage point less than similar AMT debt, versus a 10-year average of 0.4 point, according to Bloomberg Fair Value indexes.
To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net.
