Municipal Bond Forum
If cities that issued BABs run into financial problem
Q
Interest from Build America Bonds (BABs), sold from 2008 to 2010 as part of the federal stimulus package, is 35% subsidized by the federal government. What would happen to the interest and principal if municipalities that issued BABs run into financial problems? Do the feds back the principal, and would they allow these municipalities to declare bankruptcy and even default?
A
James A. Klotz responds:
Under the BAB program, the interest subsidy was intended to assist issuers in lowering their interest costs. It was not intended to be a credit enhancement.
Issuers must file a request for a subsidy payment at the time each interest payment is due. The federal government does not make a subsidy payment if the issuer does not make an interest payment. Principal payments are not subsidized.
The federal government, then, would not intercede if an issuer experienced financial problems or defaulted on its bond payment obligations.
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