Borrowing for the future: The unintended consequences of build america bonds on low investment grade issuers of municipal bonds

The Obama Administration has proposed reinstatement of the BABs program created as part of the 2009 ARRA legislation to put state and local governments on a fiscally sustainable path by supplementing their capacity to access the bond market. However, it is cost prohibitive to issue BABs and purchase municipal bond insurance. The research questions raised in this study are specific to the lower rated municipalities: 1) did they experience an increase in issuance during the BABs program and 2) what is the effect of BABs on the re-emergence of municipal bond insurance in facilitating access to the capital markets? G.O. debt issuance for years 2001-2011 and BABs data provided by Bloomberg and Thomson Reuters are used to develop a comparative analysis. Results suggest 1) highly rated issuers significantly benefitted and 2) G.O. insured debt issued during the BABs program was down 30% for lower rated issuers when compared to the pre-BABs period.