A year ago, Florida Division of Bond Finance director Ben Watkins was one of the biggest skeptics of Build America Bonds, mostly because the taxable debt structure didn’t fit into the tax-exempt mold.
But things changed, and he’s become a big fan of BABs.
Initially, one of Watkins’ problems with the program was the risk that the federal government would change the 35% subsidy while the bonds were outstanding.
“We’ve accepted that as a risk,” he said, adding that BABs have been a great tool for Florida and have lowered borrowing costs.
Early on, Watkins said there also were impediments to using BABs because taxable investors like noncallable paper or make-whole calls — conventions that many muni issuers don’t use.
But in the first BAB deals underwriters created the “road map” that enabled municipal issuers to implement the 10-year call provision, according to Watkins. “I’ve got a way to unwind the deal if something unexpected occurs,” he noted.
However, a more recent concern has prompted Watkins to suspend using BABs while he waits to hear from the Internal Revenue Service about the extent the agency intends to intercept subsidy payments.
The IRS can offset the subsidy payment if an issuer owes the federal government money, including payments that might arise from disputes in massive programs such as Medicare and unemployment compensation, Watkins said. Nevertheless, the debt director said, “I’m guardedly optimistic we can resolve this challenge and be back in the [BAB] market again.”
Watkins said the benefits of the new tool have been across the board, including opening muni issuers to a new and much larger investor base.
“We’re really at the tip of the iceberg accessing all the credit that’s available,” he said. “I truly believe it is a win-win situation.”
So far, Florida has deployed BABs in 12 transactions where bifurcated structures were used to issue $400 million of tax-exempts with short-term maturities and $1.6 billion of BABs were sold with longer maturities.
The state saved $250 million over the life of the offerings using BABs, Watkins said.
