Treasury Extends ARS Deadline

WASHINGTON - The Treasury Department announced yesterday that governmental issuers can purchase and hold auction-rate securities, variable-rate demand bonds with seven-day put options, and tax-exempt commercial paper until Dec. 31, 2009.

The statement was made in a five-page notice after market turmoil spread liquidity and stability problems to other areas of the short-term tax-exempt bond market besides auction-rate securities, the Treasury said.

Prior to the announcement, issuers had until just yesterday to purchase their auction-rate securities, which they could then hold for up to 180 days without the bonds being considered retired or reissued, which would require issuers to repeat a complicated set of arbitrage and other tax-related tests on the bonds.

The new notice still maintains the 180 day ownership window, but allows issuers to purchase those bonds over the next 15 months. They can hold the debt until Dec. 31, 2009.

Municipal market participants immediately praised the notice for providing much-needed relief.

"We all have to be highly appreciative of the response by [the Internal Revenue Service] and Treasury to the problems being faced by issuers of floating-rate bonds. It comes at a real time of need," said David Caprera, a partner at Kutak Rock LLP in Denver. "Until confidence, credit,and liquidity returns to the tax-exempt market, municipal issuers will continue to struggle with unusually high rates of interest. The ability to buy and hold their bonds will give many issuers flexibility and provide relief from this interest rate environment."

"Treasury and the IRS are to be commended for their timely efforts to address the liquidity difficulties municipal issuers were facing," said Tom Vander Molen, a partner at Dorsey & Whitney LLP in Minneapolis. "This is very helpful, not only in extending the Oct. 1 date, but also the type of bonds that can be purchased and held under this rule ... and how long they may be held."

The notice also expands the reach of two previous notices issued earlier this year in that issuers of variable-rate demand bonds and short-term commercial paper, as well as issuers of ARS will be able to purchase and hold their obligations for 180 days.

According to the notice, issuers will be able to refund purchased bonds by issuing refunding bonds, tender them for purchase in a qualified tender right, or otherwise resell the purchased bond at any point during the time they hold them.

While the notice did not explicitly include auction-rate debt in its extension of the purchase and holding date, in its March notice on reissuance, the Treasury stated that ARS are considered "qualified tender bonds" for purposes of the notice, and that definition extends to the most recent notice.

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