Bond Accountability Commission 2 Recommendations Page 20
QSCBs, in the form originally authorized under federal law for the first time in early 2009, provide tax credits and taxable interest to investors, rather than tax-exempt interest (“credit QSCBs”). The goal of the federal legislation was to provide sufficient levels of income tax credits to investors that school districts would not be required to pay any interest at all—a goal that largely failed, as discussed below in conjunction with the recent experience of the City of Milwaukee. Credit QSCBs were a relatively new form of municipal securities and had a more limited investor appeal than traditional bonds,14 requiring an investor educational effort in order to build the market. As a result, many underwriting firms were reticent to commit to large purchases without significant premarketing efforts. Underwriters had concerns about the possibility of having to hold credit QSCBs in inventory for extended periods, thereby tying up dealer capital, before the bonds could be sold to investors. That created a risk that the underwriters might lose money if prices were to change in the market before resales of the securities could be completed. In turn, that impacted competitive bids because dealers are reluctant to bid without a full opportunity to pre-sell the bonds. This was reflected in December 2009, when the City of Milwaukee offered, in two attempted competitive bid sales, $50 million of general obligation credit QSCBs for the Milwaukee Public Schools. The ratings were “AA+” by Fitch, “Aa2” by Moody’s, and “AA” by S&P. In other words, the Milwaukee Schools offerings were similar in a number investors to receive credits. We expect very few “credit” QSCBs will be issued in the future as the “direct subsidy” QSCBs result in a cheaper net borrowing cost to the issuer. 14
The prior market for QSCBs was sufficiently limited that one institutional investor, Guggenheim Partners LLC, was reported to have “bought roughly 50% of the roughly $2.4 billion [of QSCBs] that [had been] sold as of Dec. 11, and [to have] participated in nearly every of the 144 transactions completed” through Dec. 31, 2009. Devitt, “Guggenheim Likes the Taste of QSCBs, Even Ones from Detroit” (Bond Buyer Online Dec. 31, 2009).