Build America Bonds: Legal Issues, Canceled Redemptions and Other Updates – Bond Buyer

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Build America Bonds: Legal Issues, Canceled Redemptions and Other Updates – Bond Buyer

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As some state and local governments and their agencies seek to repurchase or repay their Build America Bonds (BABs), some questions have been raised about the legality of doing so, especially since current interest rates could likely lead to an increase in Build America bonds. called by issuers this year, according to market professionals.

B.A.B., authorized in 2009 and 2010 as part of a stimulus package under the Obama administration, allowed issuers to sell taxable bonds and receive a subsidy from the federal government on the interest rates they paid to investors. The “sequestration” of the federal budget resulted in subsidies lower than promised to issuers since 2013.

The transmitters have moved call the BABs in circulation following a recent decision by the United States Supreme Court that, according to a February publication from the law firm Orricksupports the conclusion that the sequestration “resulted in a materially adverse modification of the obligation to pay the cash grant.”

Learn more: Issuers ask Supreme Court to review BAB subsidy case

JP Morgan identified 14 “unique” issuers that called BABs, issued conditional calls or announced they were considering financing plans. The six California companies have outstanding BABs totaling $6 billion, according to JP Morgan.

The Regents of the University of California reached an agreement to repurchase the outstanding B.A.B. via an extraordinary repayment clause, despite the threat of a lawsuit from investors.

This debate focuses on whether issuers are legally permitted to trigger the extraordinary buyback provision following the reduction of the 35% BAB subsidy under the government sequester process, beginning in 2013. The level of current escrow is 5.7%. Repayments of BABs using the extraordinary repurchase provision have only recently entered the conversation in a significant way, following a 2023 judicial opinion arising from Indiana Municipal Power Agency v. United States.

After the ruling, Orrick partners Charles C. Cardall and Barbara Jane League said in a report published on the firm’s website that the decision provides “supportive guidance” to issuers questioning whether the receivership “constituted an ‘extraordinary event’ that would trigger their right to request an extraordinary optional redemption.”

Learn more: Mega-deals from New York Waters, Harvard and Cal Regents See Strong Demand in Primary Sector

The State of Washington repaid part of its overdue BABs, despite reluctance due to these debates.

James Pruskowski, chief investment officer at 16Rock Asset Management and a market participant who holds no BAB, told the Bond buyer These extraordinary repayment provisions are primarily focused on “those large, sophisticated emitters with densely populated areas and primarily on coastal regions, such as new YorkCalifornia and Washington.”

Bondholders have enjoyed several years of strong earnings and stable prices, so it can be “painful to lose that premium from exercising ERP,” Pruskowski said.

Norfolk, Virginia, became the first transmitter to cancel its B.A.B.s refund. Norfolk gave no reason for canceling its buyback or bond issuance plans. However, the city said it reserves the right to call BAB 2010B for a buyout in the future.

Learn more about the latest news from Build America Bonds in our coverage below.

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