WASHINGTON - The Internal Revenue Service has closed its examination of $375 million of local government revenue bonds sold by the Delaware Valley Regional Finance Authority in 2002 without taking any action.
The IRS action was disclosed by the authority Friday in a material event notice submitted to the nationally recognized municipal securities information repositories. The bonds, which financed a revolving loan program for local governments and school districts in four Pennsylvania counties, were selected by the IRS for a random audit in early January.
"I can't say I'm pleased to be part of a random audit, but the service recognized that the audit needed to be done quickly," Lucien B. Calhoun, president of Calhoun, Baker Inc. in Flourtown, Pa., the administrator of the authority's revolving loan program, said yesterday.
Calhoun said that in 2005 the IRS audited an almost identical bond transaction done by the authority in 1997 and concluded that there should be no change to the tax status of the bonds.
"We filed material event notices with both audits," Calhoun said. "The first time, there really wasn't a ripple. This time there was because of all the insanity in the market right now. In fact, the audit really did impact both the willingness of participants to take loans from the authority and the willingness of some credit facility providers to provide credit facilities."
"You couldn't get anybody interested in the pool who was not already involved," he added.
The proceeds of the 2002 bonds were all used to originate loans the first year after the bonds were issued, Calhoun said. The transaction involved $375 million of fixed-rate bonds that were swapped to a variable rate. The swap allows the program to stay viable when interest rates drop, he said.
Local governments can either borrow money at a variable rate or arrange for the authority to swap the bonds back to fixed rate. The proceeds to be used for loans are put into a guaranteed investment contract, which can be drawn down when the loans are originated.
The authority was created in 1985 to issue debt and provide loans to local borrowers, mostly within Bucks, Chester, Delaware, and Montgomery counties in Pennsylvania. Occasionally it will originate loans outside of the counties. Calhoun said the authority has sold roughly six series of bonds, with just about $1.2 billion of bonds outstanding, and has originated about 350 loans totaling about $2.3 billion to more than 200 local governments and school districts since it was created.
The lead underwriters on the 2002 transaction were Salomon Smith Barney, now Citi, and Merrill Lynch & Co., which served as swap counterparty at issuance and in any swaps done after the bonds are issued. Co-underwriters were the now-defunct Dolphin & Bradbury Inc., the current target of several enforcement cases and lawsuits that are unrelated to these bonds, First American Municipals Inc., and Janney Montgomery Scott LLC.
Bond counsel was Blank Rome Comisky & McCauley, now Blank Rome LLP. Underwriters' counsel was Conrad, O'Brien, Gellman & Rohn PC and Clifford Chance Rogers & Wells LLP, now Clifford Chance U.S. LLP. Carmen P. Belefonte in Media, Pa., was counsel to the authority.
