Muni-Bond Groups Look for Guidance on BAB

I guess they are looking for reassurance from the Fed in case it all goes to pot. Additionaly if there are groups in the market simply "flipping" muni-bonds. The BAB has made muni's very attractive, bit it appears that something of a wild west market is forming around these lucrative deals.

WASHINGTON — Four major municipal market groups are urging the Treasury Department to issue guidance confirming that the existing regulatory framework on issue price for tax-exempt bonds also applies to Build America Bonds and stating that if issuers follow certain long-standing practices, they can be confident they are complying with the rules in this area.

The groups stressed there is an “urgent need” for such guidance in a letter sent late Friday to John Cross 3d, the Treasury’s associate tax legislative counsel.

The groups also provided the Treasury with an analysis of market data they said confirms that the “trading up” of bonds occurs in all markets, and is actually more extreme in the corporate market than in the BAB market. The letter does not use the term “flipping,” but trading up means the same thing: when bonds are issued at one price and then immediately traded at a higher price.

The letter is a follow-up to a meeting held last month between Treasury officials and representatives of the four groups —the Government Finance Officers Association, the National Association of Bond Lawyers, the Regional Bond Dealers Association, and the Securities Industry and Financial Markets Association.

Uncertainty surrounding issue price has gripped the BAB market in recent months, since the Internal Revenue Service began asking BAB issuers if they were following the pricing of their bonds — something issuers traditionally have not done.

That line of inquiry has led to concern among muni market participants that the IRS might require issuers to rely on the actual trading of their BABs to determine issue price, instead of allowing them to rely on underwriter certifications that there was a bona fide public offering of the bonds at the initial offering price and that it is reasonable for the issuer to expect a substantial amount of the bonds will be sold to the public at that price. This traditionally has been the way issue price has been established for tax-exempt bonds.

The controversy peaked after an IRS official said during a teleconference sponsored by NABL that the service could audit up to 50% of BAB issues. The IRS has since backed down from the remark, saying the actual number of audits is likely to be much smaller. But concerns about audits have driven the need for explicit guidance to assure issuers they are compliant.

Their have been warnings about the BAB's and if their is an a major element of "flipping" these investments it could lead to trouble in the market.