Build America Bonds: A Guide to Investment and Issuance

Build America Bonds are a type of municipal bond that was introduced in 2009 to help stimulate economic recovery. They were designed to attract private investors to the municipal bond market.

The bonds were created as part of the American Recovery and Reinvestment Act, with a goal of raising $78 billion for infrastructure projects. This was a significant amount, considering the total municipal bond market was around $3 trillion at the time.

To make these bonds more attractive to investors, the government provided a subsidy of 35% of the interest payments, making them more competitive with taxable corporate bonds. This subsidy was a key feature of Build America Bonds.

Build America Bonds were only open to new issue capital expenditure bonds issued before January 1, 2011. Refinancing transactions were not eligible.

There were two types of Build America Bonds: Tax Credit BABs and Direct Payment BABs. Tax Credit BABs offered a 35% federal subsidy of the interest paid through refundable tax credits, reducing the bondholder's tax liability. The bondholder could carry forward any unused credit to future years.

Direct Payment BABs offered a similar subsidy, but it was paid to the bond issuer. The U.S. Treasury made a direct payment to Build America Bond issuers in the form of a 35% subsidy of the interest they owed to investors.

The Build America Bond program was only open to new issue capital expenditure bonds issued before January 1, 2011, so if you're looking to issue a bond after that date, you're out of luck.

Traditionally tax-exempt issuers, such as private party issuers and 501(c)(3) organizations, were not eligible to use the Build America Bond program, so if you fall into one of these categories, you won't be able to take advantage of this program.

Only state and local government issuers and governmental agencies were eligible to use the Build America Bond program, so if you're not a government entity, you won't qualify.

The program was designed to help states and localities reduce their borrowing costs, so if you're a government issuer, you might be able to save some money by using this program.

There are two types of Build America Bonds: Tax Credit BABs and Direct Payment BABs. Both types reduce the cost of borrowing for the issuer in comparison to traditional taxable corporate bonds.

Tax Credit BABs offer a 35% federal subsidy of the interest paid through refundable tax credits, reducing the bondholder's tax liability. This means if the bondholder's tax liability is insufficient to use the entire credit, it can be carried forward to future years.

Direct Payment BABs offer a similar subsidy, but it's paid to the bond issuer. The U.S. Treasury makes a direct payment to Build America Bond issuers in the form of a 35% subsidy of the interest they owe to investors.

California's $5.2 billion BAB issue in early 2009 is an example of how Direct Payment BABs can be beneficial. The state offered an interest rate of 7.4% to investors, but only had to pay 4.8% of that interest, with the federal government paying for the rest.

Build America Bonds attracted a diverse investor base, including traditional municipal bond holders and non-traditional investors.

The largest buyers of Build America Bonds include insurance companies, mutual funds, foreign central banks, and foreign commercial banks.

A total of $181 billion of Build America Bonds were issued from April 2009 to the end of 2010.

This asset class drew interest from pension funds, insurance companies, and foreign investors who may have been limited by tax considerations in investing in traditional tax-exempt municipal bonds.

Investors should consider the tax implications of investing in Build America Bonds, which can vary depending on their tax bracket and other tax liabilities.

Here are some of the key types of investors in Build America Bonds:

Investors in Build America Bonds come from a diverse background. The largest buyers include insurance companies, mutual funds, foreign central banks, and foreign commercial banks.

These investors are attracted to the potentially higher yields offered by BABs. By offering a new asset class, BABs drew interest from pension funds, insurance companies, and foreign investors who may have previously been deterred by traditional tax-exempt municipal bonds.

The investor base for BABs is more diverse than traditional municipal bonds. This is due to their taxable status, which makes them more appealing to a wider range of investors.

A wide range of investors can benefit from diversifying their portfolios with BABs. This includes pension funds, insurance companies, and foreign investors who may have previously struggled to invest in traditional tax-exempt municipal bonds.

Here are some of the key types of investors in BABs:

Investors should consult with a tax professional to understand the potential tax implications of investing in BABs.

Issuance is an essential aspect of the investment landscape. A total of US$181 billion of Build America Bonds were issued from the program's inception in April 2009 through the end of 2010.

This staggering figure highlights the significant role that issuance plays in the world of finance.