SOURCE: Breckinridge Capital Advisors

Breckinridge Capital Advisors

December 15, 2010 09:00 ET

Breckinridge Capital Advisors Debunks Top Ten Build America Bond Myths

Leading Investment Advisor Calls for Extension of the Program

BOSTON, MA--(Marketwire - December 15, 2010) - Breckinridge Capital Advisors, Inc., a Boston-based fixed income manager, today announced the top ten myths currently circulating about the Build America Bond program. As a proponent for the extension of the program, Breckinridge Capital also provided clarification for each concern.

"Sound investment in public infrastructure improves private productivity and ultimately strengthens our country's economic competiveness. In the end, a healthy municipal bond market is good for us all. Congress should recognize this fact and extend the BAB program," said Peter Coffin, president of Breckinridge Capital. "It's frustrating to see so much misinformation about the Build America Bond program, so we simply had to try to set the record straight."

Created as part of the American Recovery and Reinvestment Act of 2009, the BAB program provides municipalities with the option of issuing taxable bonds -- instead of tax-exempt bonds -- and receiving a 35 percent interest subsidy. The program broadened the sources of demand for municipal bonds to include institutional investors such as endowments, pension funds and insurance companies. Without Congressional action, the BAB program will expire on Dec. 31, 2010.

The following is a look at the top ten Build America Bond program myths and an explanation of the misconceptions, according to Breckinridge Capital:

1. Myth: Ending BABs ends the federal subsidy for municipal borrowing.
Municipal borrowing will continue to be subsidized with tax exemption, as it has been for 100 years. BABs are a different form of subsidy and widely acknowledged to be more efficient, so there is a greater public benefit relative to the cost to the Federal government.
2. Myth: BABs stabilized the municipal bond market following financial crisis and are no longer necessary.
The tax-exempt municipal market is too dependent on retail investors and, as a result, has been under-capitalized for years. Leverage and derivatives masked this fact until 2008 when they caused the municipal market's collapse.
3. Myth: Extending the BAB program would add to the Federal deficit.
The Obama administration's original proposal was to set the subsidy rate at 28 percent, which the Treasury Department has determined is no more costly than tax-exemption.
4. Myth: BABs have increased municipal debt.
Municipalities issued BABs instead of tax-free bonds. BABs have not generated any new municipal borrowing.
5. Myth: Municipalities issue BABs to finance deficits.
BABs have only been issued for financing infrastructure investments that serve a valid public purpose.
6. Myth: The BABs subsidy distorts capital flows in fixed income markets.
The BAB subsidy has no impact on municipal bond yields relative to other fixed income investments. Compared to tax-free bonds, BABs actually level the playing field.
7. Myth: Wall Street dealers profit more from BABs.
BABs have replaced alternative financing structures that were far more lucrative for Wall Street dealers. Floating rate issues (Variable Rate Demand Notes) and interest rate swaps have been much less prevalent thanks in part to BABs.
8. Myth: Municipalities borrow too much, and BABs only encourage them to borrow more.
Some municipalities may borrow more than they should. However, state and local government debt is now only 16.3 percent of GDP, which is below where it was at the start of the BAB program and down from 20 years ago. 
9. Myth: Ending BABs will force municipalities to confront structural budget problems.
Ending BABs only creates a new problem for municipalities in that it limits their access to capital for vital infrastructure projects such as schools, roads, jails, etc.
10. Myth: Ending the BAB program hastens municipal bankruptcies that would enable state and local governments to restructure other liabilities, such as excessive pensions.
Municipalities are not likely to go bankrupt. Municipal insolvency laws -- including chapter 9 -- are often inaccessible and of limited use in restructuring municipal liabilities. The process can also be extremely expensive.

To learn more about the importance of the BAB program to the municipal bond market, the appeal of BABs to institutional investors and the approach for managing a standalone allocation to taxable municipal bonds, download Breckinridge Capital's webcast on the topic titled, "Diversifying Your Portfolio with an Allocation to Build America Bonds (BABs) and Other Taxable Municipal Bonds," at  

About Breckinridge Capital Advisors, Inc.
Breckinridge Capital Advisors, Inc. is a Boston-based Registered Investment Advisor specializing in the management of customized fixed income portfolios. With over $13 billion under management, the firm works to help individuals and institutions invest in communities with taxable and tax-free municipal bonds.

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