(Bloomberg) -- Managers of the Rose Bowl, the 102-year-old stadium northeast of Los Angeles, head to Wall Street this week to refund taxable Build America Bonds into tax-exempt debt.
The iconic stadium’s municipal guardians are looking to capitalize on favorable market conditions. They also will sidestep any potential tax law changes from the incoming Trump administration that might increase interest costs on bonds from the Obama-era BAB program.
The Pasadena Public Financing Authority is selling about $105 million of lease revenue refunding bonds beginning Wednesday. The negotiated refinancing, led by Stifel Financial Corp. and Raymond James Financial Inc., targets $106.6 million in Build America Bonds issued in 2010 to expand the Rose Bowl’s concourses, build new premium seating and update broadcast facilities.
The sale is part of a series of planned refundings to replace taxable debt sold under the program with tax-exempt securities. BABs were issued in 2009 and 2010, in the wake of the Great Financial Crisis, to provide issuers a cost-effective way to finance infrastructure projects.
The federal government originally said it would cover 35% of the interest costs on the securities but has since lowered that subsidy anywhere from 8.7% to 5.7% through sequestration. Consequently, issuers have endured higher debt service costs.
Subsidy Risk
Following the election of a Republican President and the party gaining a majority in the Senate earlier this month, issuers are concerned about added risk to the direct subsidies that support BABs.
“Scaling back or eliminating the BABs subsidy has been mentioned several times as a potential ‘pay for’ as part of a larger package to extend the 2017 tax cuts,” said Justin Marlowe, a professor at the University of Chicago’s Harris School of Public Policy. “All indications are that the Trump administration intends to push that package as soon as possible.”
Meanwhile, market conditions provide an opportunity for issuers to refinance their BABs, according to Marlowe.
“The 10-year exempt-to-taxable ratio is quite rich - about 68% as of Monday,” he said. “That’s a good opportunity for an issuer to move from taxable to tax-exempt yields.”
S&P Global Ratings assigned the bonds an AA+ rating.
“Setting aside the recent market volatility, we do expect strong investor demand,” said Dora Lee, research director at Belle Haven Investments. “The Rose Bowl name definitely will attract more interest, especially with retail accounts.”
Pennsylvania State University, Florida State University and the University of Memphis all had successful stadium debt sales within the past few months, according to Marlowe.
“And while noteworthy, none of those deals had the brand recognition of the Rose Bowl,” he said.
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