NEW YORK & CHICAGO--(BUSINESS WIRE)--Complementary financing options, such as the taxable America Fast Forward Bonds (AFFBs), combined with traditional tax-exempt bonds and federal funding, such as the Transportation Infrastructure Finance and Innovation Act (TIFIA), would broaden the U.S. infrastructure investor base globally and lead to greater project feasibility, Fitch Ratings says.
Last month the short-term extension of the Highway Trust Fund underscored the increasing role of parallel private investment. According to one estimate by the American Society of Civil Engineers, the U.S. will need to invest $3.6 trillion in infrastructure by 2020. Recent proposals focused on the tax-exempt infrastructure market, such as Qualified Public Infrastructure Bonds (QPIBs) and Move America Bonds, are important steps. For decades, tax-exempt debt has served as an invaluable financing option for governmental and tax-exempt entities.
During a period of economic uncertainty, one complementary financing vehicle called the Build America Bonds (BABs) program allowed state and local governments to sell taxable bonds and receive a subsidy (a "direct pay" option) from the federal government for 35% of the bonds' interest costs. A total of $181 billion of BABs were issued through the life of the program from April 2009 to end-2010, according to the U.S. Treasury Department. This supported new public capital infrastructure projects, such as schools, bridges and hospitals, and had a very strong reception from both issuers and non-traditional municipal investors.
The largest buyers included pension funds and foreign investors, and their strong demand at the mid- to long-end of the curve for the product, coupled with the interest subsidy, resulted in a Treasury-estimated $20 billion in borrowing cost savings, on a present value basis, compared to tax-exempt bonds.
U.S. infrastructure debt, including public-private partnership (PPP) projects, could be an increasingly important asset class for institutional investors searching for yield. At the end of April, nearly half of all sovereign bonds were yielding 1% or less, while nearly $5 trillion had negative yields. Both issuers and investors would value the expanded financing options proposed by the Incentives for Investment in Infrastructure section within the federal budget, specifically the direct-pay AFFBs and tax-exempt QPIBs. The BAB-comparable AFFBs, or some variation thereof, could potentially offer investors higher yields with little additional issuer credit risk, while issuers would benefit from low borrowing costs via an interest subsidy, in this case proposed at 28%. This would allow issuers to select the optimal capital structure based on current market conditions and investor preferences rather than a "one-size-fits-all" approach.
Traditional investors in the $3.8 trillion tax-exempt market, including households (44%), money market and mutual funds (26%) and insurance companies (12%), invest in this market partly because of the tax exemption. Pension plans have $20 trillion in domestic assets, while foreign investors manage tens of trillions more abroad. These investors are likely to be attracted by greater yields at reasonable risk levels, as they do not benefit from the U.S. tax exemption. Including this investor base could significantly help meet U.S. infrastructure investment needs.
New investors would likely seek some assurance that the commitments of government will not be reversed retroactively. Sequestration was an unexpected risk that caused considerable consternation for issuers and investors earlier this decade. The U.S. executive and legislative branches will need to consider ways to mitigate this public policy uncertainty or risk that the benefits from broader investor interest and the desired objectives of expanded infrastructure investment will be diminished.
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