California Offering Record $6.9 Billion in Build America Bonds

California today issued $6.9 billion in new, taxable Build America Bonds. The bond offering, the largest in California's history, was the third Build America bond offering and showed the market for these securities is off and running.

California is issuing today $6.9 billion in new, taxable Build America Bonds.  The bond offering, the largest in California's history, will be the third Build America bond offering and shows the market for these securities is off and running.

California is selling $5 billion in 20-30 year maturity bonds that are subsidized through the Federal Government's Build America bond program.  An additional $1.855 billion is being offered without government subsidies.

The bonds are expected to price between 345 to 365 basis points above Treasuries.  That means that a 30 year bond would pay 7.45%.  Unlike many municpal bonds, Build America Bonds are not tax exempt.  Instead, the issuer receives a rebate of 35% of the interest cost from the Federal Government, and may, at its discretion offer tax credits to buyers. 

The yields on the bonds are higher than normal municipals because the interest is not tax-exempt but it's still cheaper for the issuer because of the goverment rebate.  Buyers are attracted to the higher yield as well as the relative safety of municipal debt.  Most data shows that municipally backed debt is safer than its corporate debt cousin.  Municipal bonds have a very low default rate, especially when stacked up against corporate bonds.

The California issuance is the largest bond offering in its state history, the fourth largest in municipal bond history, and the second largest taxable offering after  Illinois’s $10 billion pension bond offering in 2003.

The subsidized portion of the offering will go to projects normally associated with tax-exempt municipal bond offerings - schools, roads, and parks.  The $1.855 billion will be used for stem cell research, housing, and other projects that often require taxable offerings.

The bond issuance was done by Goldman Sachs Group Inc., JPMorgan Chase & Co., Barclays Plc and Morgan Stanley.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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