Volatile market conditions, higher ratios and rising interest rates have led to a slowdown in Build America Bond redemptions recently, but there are still a number of issuers that have signaled they intend to call back their BABs before yearend.
About $14.9 billion of BABs have been called in 2024 while $938.3 million is set to be called, according to data from J.P. Morgan. Year-to-date, 39 issuers have priced deals to refund their outstanding BABs, the data shows.
Estimates earlier this year showed that up to $30 billion of outstanding BABs were candidates to be called back via an extraordinary redemption provision, which issuers began to use following a
Issuers will only refund outstanding BABs if it makes sense economically, and it makes sense economically when rates are substantially lower than they are today, said Nick Venditti, head of Municipal Fixed Income at Allspring.
And with the 10-year UST at 4.27% and
BAB refundings got off to a slow start in the first quarter of the year before spiking in the second quarter of 2024 and then slowing in the third quarter, according to J.P. Morgan.
June saw the most deals coming to market to refund their BABs in eight transactions, followed by April with seven, the data shows.
January saw the fewest number with only one deal coming to market to refund BABs through ERPs. February had two deals and July and October had three deals apiece.
The largest BABs refunding came from the
“BAB refinancings have diminished in popularity following a significant increase in the second quarter,” said James Pruskowski, chief investment officer at 16Rock Asset Management. “Rising interest rates have disincentivized issuers, and a lackluster Q3 from a seasonal standpoint has reduced urgency for refinancing.”
Broadly, he noted “both issuers and investors have moved past the concerns raised in Q2 regarding ERP language in bond indentures, leading to a greater recognition that pain in one area can translate to gains in another.”
And as muni-UST ratios move higher, there will likely be fewer BAB refundings called through ERPs, said Barclays strategist Mikhail Foux, noting ratios have risen as tax-exempts have underperformed over the last several months.
Market volatility played a role in the Ohio Water Development Authority pulling its deal of $102.02 million of Fresh Water Revolving Fund water development refunding revenue bonds which were set to price Oct. 24.
The Series 2024B bonds were set to refund all or a portion of its Series 2010A-2 BABs, according to a notice posted on EMMA.
The volatility resulted in an estimation by the authority that the NPV savings would potentially be de minimis on the $102 million transaction, if not eliminated, said Mike Fraizer, executive director of the Ohio Water Development Authority.
“So the authority decided to pause until the market stabilizes and then we can achieve the intended purpose of the transaction: to have more favorable net present value savings,” he said.
The authority still plans to refund its outstanding BABs, just at a later date, according to Fraizer, noting
The university did not back down, choosing to
Even with the controversy hanging over issuers’ heads, many others have proceeded with plans to refund their BABs.
Ballard Spahr recently participated in a recent BABs refunding deal for
“There were no bondholder questions as part of the deal we did, and we approached it the same way we did at the beginning, which was to carefully look at the language and ensure that we could do the deal,” she said, noting there was no “noise” around the recent deal.
Nixon Peabody, at one point, was fielding two to three calls per day about BABs refundings, but those inquiries “slacked off pretty significantly” over the last few months, said Johnny Hutchinson, partner at the firm.
Currently, outstanding BABs are “super cheap” because few investors want them given the call risk, Venditti said.
Taxable munis are more enticing to institutional investors, such as insurance companies, which are attempting to match assets and liabilities. If the bonds are called, that negatively affects performance, he noted.
While sequestration was the primary reason issuers have called their BABs — without the full interest rate payment subsidy, it makes little sense for issuers to leave them outstanding — investors also have little incentive to hold them or buy a BABs like product in the future, Venditti said.
BABs or a similar product may give investors pause unless legislative language explicitly makes the call structure ironclad. BABs are “almost uninvestable because of this dynamic that’s been created,” he said.