Direct-Pay Bonds Part Deux?

May 14, 2021

Sarah Wynn has a great article in The Bond Buyer about a bi-partisan push to bring back direct-pay bonds as part of an infrastructure stimulus bill.

Similar to the popular Build America Bonds (BABs) authorized by President Obama for stimulus in 2009 and 2010, the new version of direct-pay bonds would include a subsidy rate of 28% and would be exempt from sequestration.

As with BABs, the issuer would receive a direct payment from the federal government to cover a percentage of the interest costs associated with the taxable bonds.

Sequestration is a big matter for issuers, as many feel burned by the federal government after reimbursement levels in the initial BABs program were reduced many years after the program was instituted. The actual subsidy levels, though, are a matter of policy.

Issuers in #muniland will want to see as high of a subsidy level as possible. But Congress could prioritize different types of infrastructure projects over others. For example, Oregon Senator Ron Wyden has proposed a direct pay subsidy of up to 70% for so-called clean energy bonds. Here’s more on that proposal here

From my perspective, bringing back direct-pay bonds would be a significant tool for issuers to reduce their borrowing costs, tap new taxable private capital, and finally start accelerating infrastructure projects across the country.

It is important to note that not all issuers took advantage of the initial BABs program by issuing direct-pay bonds in 2009 and 2010. But all issuers benefitted from that program, as tax-exempt yields nose-dived when billions of dollars in supply shifted to taxable markets. I expect the same would happen again if this sort of program was brought back in 2021. 

Colin MacNaught

Colin MacNaught

CEO & Co-Founder @ BondLink