New bond types in infrastructure package may take time to ramp up

BY SourceMedia | MUNICIPAL | 11/22/21 02:13 PM EST By Caitlin Devitt

The new infrastructure law introduces for the first time in 16 years fresh private activity bond categories, which are structured to avoid taking a big bite out of states? private activity bond volume cap.

The Infrastructure Investment and Jobs Act allows the issuance of tax-exempt private activity bonds for qualified broadband projects and carbon dioxide capture facilities. The new law also increases the separate nationwide volume cap for qualified highway or surface freight transportation freight bonds to $30 billion from $15 billion.

The broadband and carbon capture bonds will be 75% exempt from volume cap, a relatively rare move that will mean relief for states that want to encourage the projects but already see high demand eating into their volume cap. If the broadband project is owned by the government, the bonds will be entirely exempt from the volume cap.

?The fact that there are new categories that have only a 25% volume cap is a new twist and shows even more of a commitment by the administration to get behind these types of technologies and these types of projects,? said Marybeth Orsini, public finance partner at Ballard Spahr.

President Joe Biden signed the IIJA into law on Nov. 15, enacting a package that will spend more than $1 trillion on infrastructure projects across the country. In addition to federal grant money, the bill encourages public private partnerships and expands the use of PABs.

The new bond categories, which can be issued starting in 2022, are not likely to immediately bump up new money issuance, said Tom Kozlik, head of municipal research and analytics at HilltopSecurities.

?As of right now I?m not expecting issuance in these categories to move the needle of my overall forecast in 2022,? Kozlik said.

Issuance may be slow to ramp up in part because Treasury will still need to issue guidance on the carbon capture bonds, Orsini noted.

?Oftentimes, when new types of bonds are introduced, it takes the market a few months to adapt how best to use them, and the volume increases significantly once folks see the first couple of deals,? Orsini said.

The qualified broadband projects are expected to be located in rural areas where at least 50% of residential households do not have access to fixed, land-based service, said Marc Kamer, an Ohio-based partner at Dinsmore & Shohl LLP.

Carbon dioxide capture projects include facilities that capture carbon dioxide or equipment that captures carbon dioxide at industrial sites.

The broadband projects are ?going to be important for underserved areas of the US, and it could lead to transactions and spur investments,? Kamer said.

The broadband projects are somewhat more likely to be structured as public private partnerships, while the carbon capture projects may be more likely to be privately operated, attorneys said.

It?s fairly rare that new PAB categories are created, with the last example being the highway surface freight transfer facilities PABs created in 2005, said Dinsmore partner Cliff Pastel.

Those bonds, as well as qualified public education facilities bonds created in 2001 and qualified green building and sustainable design project bonds created in 2004 all had their own separate volume cap limit, Pastel said.

The success of the highway surface freight bonds is illustrated in the fact that all but $11 million of the $15 billion volume cap was hit, Pastel said.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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