U.S. House Approves Extending Build America Bonds Through 2013

By William Selway and Ryan J. Donmoyer

March 24 (Bloomberg) -- The U.S. House of Representatives approved an extension to the Build America Bonds program, the economic-stimulus measure that has cut interest costs for local governments and fueled a rally in tax-exempt debt.

The House passed by a vote of 246-178 the bill extending the program until April 2013. Build America provides direct subsidies to state and local governments that sell taxable bonds, an alternative to traditional municipal debt, which provides tax breaks to investors. Borrowers from California to New York have sold $87 billion of the new taxable bonds to fund public works, according to data compiled by Bloomberg.

“The money goes to local communities for infrastructure and that creates jobs,” Sander Levin, a Michigan Democrat and acting House Ways and Means Committee chairman, said of the Build America program during debate on the House floor. “It’s one of the economic recovery effort’s biggest successes.”

The federal program was created in the wake of the credit crisis to ease borrowing by cities and states by opening access to a broader pool of investors. It has since become the fastest- growing part of the $2.8 trillion municipal bond market and helped bolster prices of tax-exempt securities by decreasing the supply as more issuers turned to Build America debt.

Traditional tax-exempt bonds returned about 14.5 percent last year, the most since 2000, according to Bank of America Merrill Lynch Indexes.

President Barack Obama last month proposed extending and expanding the program, which is scheduled to expire at the end of this year.

‘Market Psychology’

Continuing the program may encourage investors by providing clarity, said Justin Hoogendoorn, a managing director with BMO Capital Markets in Chicago.

“It’s very important from a market psychology perspective,” Hoogendoorn said in an interview this week. “It’s not like at the end of the year it’s going to be gone.”

The bill would reduce the federal subsidy, which now covers 35 percent of the issuer’s interest costs. The amount would fall to 33 percent in 2011, 31 percent in 2012, and 30 percent in 2013, according to a congressional summary. Obama’s proposal last month called for reducing the subsidy to 28 percent.

The vote sends the measure to the Senate, where the program has met opposition from some Republicans. Iowa’s Charles Grassley, the senior member of his party on the tax-writing Finance Committee, criticized the program for providing high fees to underwriting firms, while Minority Whip Jon Kyl faulted it for encouraging states with lower credit ratings to take on more debt.

Mike Nicholas, chief executive officer of the Regional Bond Dealers Association, a Washington group that lobbies on behalf of local underwriters, said he is confident the extension can overcome such opposition.

“There’s an overwhelming support for BABs,” Nicholas said this week. “We’re very optimistic.”

To contact the reporters on this story: William Selway in San Francisco at wselway@bloomberg.net; Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net