By setting up municipal sales desks in foreign offices 10 years ago, top-ranked underwriter Citigroup Inc. had a head start in selling taxable munis to foreign investors, which turned out to be a boon once Build America Bonds were introduced last year.
Build America Bonds, the taxable asset that offers issuers a 35% direct interest payment from the federal government, are on track to reach $100 billion of total issuance in the coming weeks, according to Thomson Reuters.
Since the BABs hit the market in April 2009, Citi has senior managed $12 billion of the bonds on 66 deals, or 12.4% of the market.
But despite the BAB program's broad use and the subsidy's effectiveness at reducing borrowing costs for state and local governments, coupon rates remain high relative to their corporate and sovereign peers, in part because foreign appetite has been minimal.
Underwriters have been hoping to change that by marketing municipal bonds in general, and BABs in particular, to an international audience not so familiar with the market.
"Muni credits don't sell themselves abroad," said Patrick Brett, a director of Citi's municipal securities division in New York, who in the 2000s spent a year in London and a year in Hong Kong setting up muni desks for a then-small taxable municipal market. "Even though some of these issuers have been coming to market for 200 years, they're basically all new to our foreign clients."
With a team of senior bankers over the past several months, Brett met with investors in 14 different countries and sent marketing materials to potential buyers in an additional 15 countries.
"To the extent you can get those 800 or 1,000 buyers who are on the fence right now, off the fence, that will only help to tighten in spreads relative to corporates and sovereigns," Brett said of the foreign buyer base. "It's really to everyone's benefit, not just the issuers, but also to the federal government, given the 35% subsidy."
Relative to corporate and sovereign debt, Citi data indicates that BABs yield 30 to 100 basis points higher on average, and the biggest reason for that is the narrower buyer base, Brett said.
In recent months the BAB spreads versus corporate debt has been steadily tightening. According to data from JPMorgan Chase, the spread between A-rated BABs and Treasuries fell from around 225 basis in November to around 180 basis points at the end of April. The spread of A-rated BABs to comparable corporates, based on the JPMorgan US Liquid Index, has also fallen from 90 basis points at the turn of the year to less than 60 this week.
When BABs were first introduced, each deal had 50-100 buyers in them, while more recent deals have garnered appetite from 150-200 buyers, Citi said about the deals with which it is familiar
Some of those buyers include domestic and international pension funds and life insurance funds, and Brett said sovereign funds and central banks were also becoming involved.
Still, corporate issuances typically have 1,000 to 2,000 buyers, so there should be plenty of room to induce appetite.
General obligation BABs from California were considered a natural target for investor interest on Citi's international tour, because of the state's size and its name.