BMO's Hoogendoorn: Muni issuers both love and fear Build America Bonds

By Sheri Kasprzak

New York, April 15 - Build America Bonds are universally loved one year after their debut, but some of that love might be mixed with fear from issuers, said Justin Hoogendoorn, managing director of fixed income at BMO Capital Markets.

Hoogendoorn said during a second-quarter media conference call that some issuers might fear that they are now dependent upon the federal government for that subsidy.

"This is a product that is nearly universally loved," Hoogendoorn said during the call.

"It was accepted by issuers, investors, even government officials. But there have been some bumps along the way. The subsidy has created more of a love-fear relationship than a love-hate relationship, especially among issuers."

Hoogendoorn noted that the State of Florida initially brought the fear issuers might have about Build America Bonds to light when it temporarily suspended issuance of them in March. The state expressed its concern that the Internal Revenue Service might block federal interest-cost subsidies. The IRS could block those 35% subsidy payments if states owe the federal government for other programs.

This could bring states' independence into question, Hoogendoorn said.

Even so, Build America Bonds provide a benefit of 50 to 100 basis points even at the post-subsidy level.

"As long as the dollars make sense in a difficult economy, these [Build America Bonds] will make sense," said Hoogendoorn.

The fear doesn't end with issuers, however. Some government officials and other stakeholders might love Build America Bonds because they're job creators. But the bonds provide plenty of controversy, especially when it comes to fiscal responsibility. The bonds have a large and direct impact on federal costs.

With the Tea Party movement growing, Hoogendoorn said, fiscal responsibility is going to be a huge issue going forward, and that issue might negatively impact Build America Bonds over the long term.

Although municipals in general are growing in popularity, investors on the tax-exempt side should be cautioned to look for quality, Hoogendoorn said. Investors should focus on general obligation bonds and essential resources revenue bonds, he recommended.

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