Federal stimulus bonds are driving business

Amanda Bronstad
May 13, 2009

A new type of government bond designed to lift the economy is providing work for lawyers, particularly those who represent bond issuers and underwriters.

Build America Bonds (BABs) were created under the economic stimulus plan that President Obama signed in into law in February. Only government agencies, such as local and state governments, public universities and public schools, are allowed to use the bonds, and then for a limited period.

On April 3, the Internal Revenue Service issued guidance regarding BABs, triggering a burst of offerings in states including California, Minnesota, New Jersey, New York and Virginia.

BABs, while not necessarily revitalizing the bond market on their own, could keep firms busy, as clients have expressed interest, bond lawyers said.

"It's another option for issuers that can qualify for it," said David Richardson, head of the public finance practice at McGuireWoods of Richmond, Va. "It doesn't cure everything, but it's just another arrow in the quiver of a government issuer."

In recent weeks, government agencies have issued large bond offerings, many of them involving the first BABs. The largest issuer to date was the state of California, which in April sold $5.23 billion in BABs as part of $6.85 billion in general obligations bonds to finance approximately 5,000 infrastructure projects. The New Jersey Turnpike Authority sold $1.32 billion in BABs to finance construction projects and New York's Metropolitan Transportation Authority sold $750 million in BABs.

INTEREST SUBSIDIES

The most popular form of BAB provides issuers with Treasury Department subsidies worth 35% of the interest, lowering the cost of the bonds. This form of bond is available through 2010.

Another type of BAB provides a 35% tax credit to the bondholder.

"The purpose in each case is to reduce the interest cost to the issuer," said Roger Davis, chairman of the public finance department at Orrick, Herrington & Sutcliffe, which served as bond counsel to the state of California in its recent BAB. "If the issuer gets a check, on a net basis, that interest cost has been decreased. If the bondholder gets a credit, then he'll ask for less interest than if he wasn't getting credit."

Richardson's firm, McGuireWoods, served as bond counsel to the University of Virginia, which issued $250 million of BABs in April for new capital expenditures. The school estimated that it saved $2 million annually, he said.

"That's real money, which is why a lot of people are looking at these things," Richardson said.

That was the first BAB that his firm handled, he said, but about a dozen other clients are considering the new bonds.

Thomas D. Vander Molen, a partner in the Minneapolis office of Dorsey & Whitney, said that BABs are being considered or pursued for a number of his firm's projects. Dorsey & Whitney was bond counsel to the University of Minnesota in an offering in April that included $37 million in BABs. The offering financed land and building purchases, construction projects and equipment installations. "This new approach certainly has been attractive to a number of our clients, including the university," Molen said.

Some lawyers have discovered that BABs require more complicated legal work. BABs must be structured and documented in a way that reflects their taxable status, which involves drafting complicated make-whole redemption provisions, among other things, that are more common in the taxable market, Davis said.

Not all the lawyers involved in BABs are bond counsel. Catherine Holmes, a partner at Los Angeles-based Jeffer, Mangels, Butler & Marmaro, represents hotel developers that are considering BABs to finance projects. The developers cannot issue the bonds directly, but work with government entities that could.

Several cities, for instance, are considering building convention centers, Holmes said. And some Indian tribes, which qualify as potential BAB issuers, have hotel projects in the works.

"Any transaction that relates to building a project, whether a hotel or a water treatment plant or any other facility that can be built with these bonds," she said, "creates work for attorneys, construction companies, everyone involved in the process of building."

A new type of government bond designed to lift the economy is providing work for lawyers, particularly those who represent bond issuers and underwriters.

Build America Bonds (BABs) were created under the federal government's economic stimulus plan, which President Obama signed in into law in February under the American Recovery and Reinvestment Act of 2009. Only government agencies, such as local and state governments, public universities and public schools, are allowed to use the bonds, which are available for a limited period.

On April 3, the Internal Revenue Service issued guidance regarding BABs, triggering a burst of offerings in states including California, Minnesota, New Jersey, New York and Virginia.

Lawyers said that BABs, while not necessarily revitalizing the bond market on their own, could keep firms busy, as clients have expressed interest in the offerings.

"It's another option for issuers that can qualify for it," said David Richardson, head of the public finance practice at McGuireWoods of Richmond, Va. "It doesn't cure everything, but it's just another arrow in the quiver of a government issuer."

REDUCING THE COST

The bond market has struggled under the weight of the recession. But in recent weeks, government agencies have issued large bond offerings, many of them involving the first BABs. The largest to issuer date was the state of California, which in April sold $5.23 billion in BABs as part of $6.85 billion in general obligations bonds to finance approximately 5,000 infrastructure projects, including roads and schools. In recent weeks, the New Jersey Turnpike Authority sold $1.32 billion in BABs to finance construction projects and New York's Metropolitan Transportation Authority sold $750 million in BABs.

The most popular form of BAB thus far provided the issuers with Treasury Department subsidies worth 35% of the interest, thereby lowering the cost of the bonds. This form of bond is available through 2010.

Another type of BAB provides a 35% tax credit to the bondholder.

"The purpose in each case is to reduce the interest cost to the issuer," said Roger Davis, chairman of the public finance department at Orrick, Herrington & Sutcliffe, which served as bond counsel to the state of California in its recent BAB. "If the issuer gets a check, on a net basis, that interest cost has been decreased. If the bondholder gets a credit, then he'll ask for less interest than if he wasn't getting credit."

REAL MONEY

Public finance lawyers been talking to clients about issuing BABs in the near future. Richardson's firm, McGuireWoods, served as bond counsel to the University of Virginia, which issued $250 million of BABs in April for new capital expenditures. The school estimated that it saved $2 million annually, he said.

"That's real money, which is why a lot of people are looking at these things," Richardson said.

The University of Virginia's was the first BAB that his firm handled, he said, but about a dozen other clients are considering the new bonds.

Thomas D. Vander Molen, a partner in the Minneapolis office of Dorsey & Whitney, said that his firm has a number of projects in which BABs are being considered or pursued. Dorsey & Whitney served as bond counsel to the University of Minnesota in a bond offering in April that included $37 million in BABs. The offering, which financed land and building purchases, construction projects and equipment installations, was the firm's first BAB, Vander Molen said.

"We're still working on a lot more of the traditional financings, but this new approach certainly has been attractive to a number of our clients, including the university," he said.

For some lawyers, BABs require more complicated legal work. For example, BABs must be structured and documented in a way that reflects their taxable status, which involves drafting complicated make-whole redemption provisions, among other things, that are more common in the taxable market, Davis said.

Not all the lawyers involved in BABs are bond counsel. Catherine Holmes, a partner at Los Angeles-based Jeffer, Mangels, Butler & Marmaro, represents hotel developers across the country that are considering BABs to finance projects. While the developers cannot issue the bonds directly, they work with government entities that could.

Several cities, for instance, are considering building convention centers, Holmes said. And some Indian tribes, which qualify as potential BAB issuers, have hotel projects in the works.

"Any transaction that relates to building a project, whether a hotel or a water treatment plant or any other facility that can be built with these bonds," she said, "creates work for attorneys, construction companies, everyone involved in the process of building."