Public Finance Update - April 2009

Recently, the Treasury Department released several notices relating to the Build America Bond program (the "BAB Program") and certain other tax credit bonds authorized under the American Recovery and Reinvestment Act of 2009 (the "Recovery Act"). The notices include Notice 2009-26, Notice 2009-29, Notice 2009-30, Notice 2009-33, and Notice 2009-35 (collectively, the "Notices").

Notice 2009-26 provides guidelines with respect to the three types of taxable bonds authorized under the BAB Program: (1) tax credit bonds, which provide tax credits to bond investors equal to 35% of the total interest payable on the bonds; (2) direct payment bonds, which provide refundable tax credits directly to issuers equal to 35% of the total interest payable on the bonds; and (3) recovery zone economic development bonds, which provide refundable tax credits directly to issuers equal to 45% of the total interest payable on the bonds. Among other things, Notice 2009-26 provides guidance with respect to the types of projects eligible for financing under the BAB Program, payment procedures for the issuer subsidies, elections that issuers must make to participate in the program, and how issuers must report the issuance of bonds under the BAB Program to the IRS using form 8038-CP.

Notice 2009-29, Notice 2009-30, Notice 2009-33, and Notice 2009-35 provide guidelines with respect to Qualified Energy Conservation Bonds ("QECBs"), Qualified Zone Academy Bonds ("QZABs"), Clean Renewable Energy Bonds ("CREBs"), and Qualified School Construction Bonds ("QSCBs"), respectively. QECBs were originally authorized under the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (the "2008 Act") to finance "qualified conservation purposes," including facilities and research. Among other things, Notice 2009-29 divides the $3.2 billion volume cap for QECBs to the various states, including $381,329,000 for California. QZABs were originally authorized under the 2008 Act to be issued by school districts to finance certain educational projects, including building rehabilitation and teacher training. Among other things, Notice 2009-30 divides the $400 million volume cap for QZABs to the various states, including $44,364,000 for California. CREBs were originally authorized to be issued by certain governmental, not-for-profit, and cooperative entities under the Energy Tax Incentives Act of 2005 to finance certain clean renewable energy projects. Among other things, Notice 2009-33 provides guidance with respect to the types of projects eligible for financing using CREBs, as well as the entities qualified to issue CREBs and the procedures for allocating the $2.4 billion volume cap to such issuers. QSCBs are authorized by the Recovery Act to be issued by state and local governments to finance construction or rehabilitation of school facilities. Among other things, Notice 2009-35 divides the $11 billion volume cap for QSCBs to the various states, including $773,525,000 to California and $581,966,000 to "large local educational agencies" in California.

The Treasury Department also recently provided guidelines for its Public-Private Investment Program ("PPIP"), a component of its ambitious Financial Stability Plan. PPIP targets "legacy assets" – distressed loans and mortgage-backed securities originated prior to 2009. Treasury plans to allocate $75 to $100 billion of TARP funds to Public-Private Investment Funds ("PPIFs"). When combined with private capital and FDIC guarantees, Treasury hopes the PPIFs will generate at least $500 billion to purchase targeted legacy assets. TARP investments will be split between the Legacy Loans Program, which targets distressed real estate loans held on the balance sheets of eligible banks, and the Legacy Securities Program, which expands the Term Asset-Backed Securities Loan Facility and provides guidance regarding the formation of PPIFs for distressed mortgage-backed securities.

The yield on AAA-rated 30-year municipal bonds dropped slightly during the last 30 days from 3.76% to 3.68%, while the yield on 30-year treasury bonds remained relatively steady at 4.91%. The following table compares the yields on both of these benchmark securities since the beginning of 2009.

Source:
Bloomberg (www.bloomberg.com)

Unemployment continues to worsen, reaching 8.5% nationally. However, certain other indicators relevant to the bond market showed signs of life in February 2009, including housing starts, which registered a 22.2% jump.

 

Sources:
Unemployment Rate and 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)