December 1, 2017 / 10:09 PM / 10 months ago

Race is on to sell tax-free bonds ahead of U.S. tax changes

CHICAGO/SAN FRANCISCO (Reuters) - The possibility that U.S. Congress could end federal tax breaks for a significant portion of the municipal market, raising borrowing costs for states, cities, hospitals and other debt issuers, is spurring a year-end spike in tax-free bond sales.

Congress could ultimately terminate federal tax exemption for private activity and advance refunding bonds starting in 2018.

That possibility, which first surfaced Nov. 2 in the U.S. House Republicans’ tax bill, would saddle nonprofits with higher borrowing costs as well as eliminate a way all muni issuers can take advantage of lower interest rates to save money.

“We’re seeing a huge race to get to market and every kind of transaction. December may be the best market for issuance that we’ve seen in a long time,” said Matt Fabian, a partner at Municipal Market Analytics.

Muni issuance totaled $40.3 billion in November, the biggest supply for that month since $45 billion of bonds were sold in November 2010, according to Thomson Reuters data. That was when issuers rushed Build America Bonds to the market before the federal government’s subsidy program for the debt expired at year end.

For the month of December, the average issuance over the last 25 years has been $25.4 billion. Already, there is $20.27 billion of bonds and notes estimated to hit the market next week.


The tax bill passed by the House last month would get rid of tax exemptions for new private activity bonds (PABs). That move is not included in a bill pending before the Senate.

Michigan-based Trinity Health moved up the sale of about $889 million of new and refunding hospital revenue bonds through conduit issuers in Michigan, Idaho and Ohio to next week from January 2018 after the House passed its tax bill.

“I look at it as kind of a risk mitigation. We were able to accelerate and mitigate any risk of where these proposals may eventually land,” said Dina Richard, senior vice president at the national Catholic health system, which operates 93 hospitals and 122 continuing care facilities in 22 states.

Denver International Airport plans to privately place $300 million of bond anticipation notes with Bank of America Merrill Lynch (BAC.N) to ensure the debt remains tax exempt when it is subsequently refinanced with long-term bonds, according to Chief Financial Officer Gisela Shanahan.

“We wanted to make sure that we have options within the framework of potential changes to the tax code,” Shanahan said.

Housing finance agencies, which exist in all 50 states and which sold $18.47 billion of bonds in 2016, are speeding up sales of PABs to finance affordable rental housing and mortgages for lower-income home buyers.

“The need is so great and the uncertainty is such that they just can’t chance not maximizing the resources available to them for affordable housing by moving this issuance more quickly,” said Barbara Thompson, executive director of the National Council of State Housing Agencies.

A provision in both the House and Senate bills would disallow all muni issuers from refinancing bonds on a tax-exempt basis beyond 90 days from their call date for interest rate savings. Current refundings of debt within the 90-day call date window would remain tax exempt.

“It does take away some flexibility for issuers to enter the market when interest rates are the best,” said David Erdman, Wisconsin’s capital finance director.

Wisconsin this week saved $21.3 million by advance refunding $368.6 million of transportation revenue bonds in a deal it had previously planned for next year, according to Erdman.

Reporting by Karen Pierog in Chicago and Robin Respaut in San Francisco; Additional reporting by Stephanie Kelly in New York; Editing by Daniel Bases and Matthew Lewis

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