The Office of Management and Budget (“OMB”) submitted a report to Congress which showed the impact of sequestration on municipal bond subsidies. OMB reported that in 2013 the federal subsidy to municipal issuers of Build America Bonds (“BABs”), Qualified Zone Academy Bonds (“QZABs”), Qualified School Construction Bonds (“QSCBs”) and Qualified Energy Conservation Bonds (“QECBs”) will be 7.6%.
In total the subsidy to issuers will be $255 million for BABs, $3 million for QZABs , $62 million for QSCBs and $2 million for QECBs. For issuers of these types of bonds, reduction in the federal subsidy becomes an issue of cashflow, credit risk and increased risk of default.
At a minimum, sequestration of the federal subsidy will allow the issuer to declare an event extraordinary redemption and call the issue. These issues were structured with the option of prepaying the issue at any time if there is simply a reduction in the federal subsidy. A reduction in subsidy in any amount may make these issues immediately and continuously callable.