Public Finance Update - March 2009

The American Recovery and Reinvestment Act of 2009 (the "Recovery Act"), recently signed into law by President Obama, expands the types of facilities that may be financed with "qualified small issue" tax-exempt bonds – so-called industrial development bonds ("IDBs"). Under prior law, the facilities that could be financed with IDBs were essentially limited to manufacturing facilities that produce tangible personal property (including related land acquisition and depreciable property). Under the Recovery Act, the concept of a financeable manufacturing facility has been broadened to include facilities used in the creation or production of intangible personal property, such as copyrights, patents, formulae, and computer software. Companies must act quickly, however, to access this new source of tax-exempt funding. At present, the new law only applies to bonds issued in 2009 and 2010.

Accessing IDB financing requires consideration of, and compliance with, many state and federal requirements, including obtaining a "volume cap" allocation and surviving the scrutiny of a public hearing. IDBs are generally limited to $10 million in principal amount and are subject to a $20 million capital expenditure limit within a six-year period within the jurisdiction where the facility is located. In addition, borrowers are also limited to a $40 million cap, including their tax-exempt financings in all jurisdictions. Please contact any of our Public Finance Team members listed in the left-hand margin with questions regarding the Recovery Act or IDBs or any other public finance issues.

Mary Shapiro, Chairman of the Securities and Exchange Commission, recently announced that the SEC plans to consider reinstatement of the so-called "uptick rule" in order to further stabilize the securities market. First adopted in 1934, the uptick rule permits short sales of securities only when the last sale price was higher than the previous price. In a short sale, an investor gambles that a stock will decline in price by "borrowing" the stock from a broker, selling the stock at the going rate, and then buying the securities back at a price that the investor hopes is lower than the original price before having to "return" the stock to the broker. Supporters of the uptick rule believe it provides protection against stock manipulation and market volatility, especially resulting from collusive "bear raids," in which short sellers join forces to drive down the price of a particular stock, often by spreading negative rumors about a company. The uptick rule was repealed in June 2007.

The California Attorney General recently launched an investigation concerning allegations that certain banks and financial advisors conspired to overcharge California issuers for derivatives and guaranteed investment contracts related to municipal bonds. The simplest version of this practice, called "bid rigging," happens when a bank intentionally loses the bid for a derivative contract in exchange for assurances of a winning bid on a future project. Several other states, including Connecticut and Florida, are conducting similar investigations and enforcement efforts. In addition, several class action lawsuits have been filed against suspect banks, and the U.S. Department of Justice, the Securities and Exchange Commission, and the FBI are all investigating bid-rigging activities across the nation.

On March 16, 2009, the yield on AAA-rated 30-year municipal bonds and treasury bonds reached their highest levels since the beginning of the year: 4.91% and 3.76%, respectively. The following table compares the yields on both of those benchmark securities since the beginning of 2009.

 

Here are a few more indicators that may provide insight into the municipal bond market.

Gross Domestic Product (4Q versus 3Q, 2008):	–3.8%
Consumer Price Index (1/09 versus 12/08):	0.4%
Existing Home Sales (1/09 versus 12/08):	– 5.3%
New Home Sales (1/09 versus 12/08):	–10.2%
Housing Starts (12/08 versus 11/08):	–15.5%

 

Sources:
Gross Domestic Product: U.S. Bureau of Economic Analysis (www.economicindicators.gov)
Consumer Price Index: U.S. Bureau of Labor Statistics (www.bls.gov)
Existing Home Sales, New Homes Sales, and Housing Starts: National Association of Realtors (www.realtor.org)