WASHINGTON - The threat that federal subsidy payments for Build America Bonds could be slashed under the sequestration process after administration officials assured issuers those payments were safe could permanently sour the muni market on BABs and other direct-pay bonds, market participants said Monday.

In a report sent to Congress Friday, the Office of Management and Budget said that, of $4.241 billion of subsidy payments authorized for issuers of BABs and other direct-pay bonds in fiscal 2013, 7.6% or $322 million would be cut early next year. The cuts would come under the legally mandated process by which $1.2 trillion would be cut from federal programs across the board because Congress failed to reduce the federal deficit last year, and the "fiscal cliff" looms.

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