WASHINGTON - The Securities Industry and Financial Markets Association is urging the Treasury to clarify whether auction-rate securities that are converted to another interest rate mode will be treated as qualified tender bonds so that they can avoid reissuance problems.
SIFMA made the request in a letter sent to the Treasury yesterday as several issuers are considering converting their auction-rate securities into other interest modes to avoid higher interest costs.
Auction-rate securities are typically insured and some of the insurance companies have experienced actual or threatened rating downgrades due to their exposure to the subprime mortgage crisis. In recent days, auctions of these securities have been failing around the country for lack of sufficient investor interest.
SIFMA's letter comes after the National Association of Bond Lawyers also asked the Treasury for clarification regarding whether a conversion of interest rate mode for auction-rate bonds within a multi-modal structure would result in the bonds being reissued.
NABL and SIFMA have both requested that the Treasury consider such bonds qualified tender bonds, meaning they would not be subject to the IRS' reissuance rules, which can require an issuer to recalculate and pay arbitrage, or hold a public hearing and seek new public approval for certain bonds under the Tax Equity and Fiscal Responsibility Act.
Internal Revenue Service Notice 88-130 outlines the rules for qualified tenders as they pertain to reissuance.
"Given recent events in the marketplace, [SIFMA] believes market participants need more comprehensive solutions than those currently encompassed in Notice 88-130. We believe there are other additional changes that could be helpful to the market and are supportive of a broader set of changes ... that are designed to aid issuers who are trying to restructure their short-term mode debt," said Leslie Norwood, managing director and associate general counsel at SIFMA and author of the letter.
NABL members told Treasury earlier this month that the definition of qualified tender bonds needed to be updated in the notice to address the recent expanded use of auction-rate bonds, which were not widely used when 88-130 was originally drafted.
In its letter, SIFMA offers two sets of recommendations: one specifically focused on the issue of qualified tenders and auctions, and another, more comprehensive set that takes up issues related to future refinancings and obligations for all tax-exempt bonds.
In the second set, SIFMA recommends a change to section 150 of the tax code that would allow any pre-authorized change in the interest rate mode of a program of tax-exempt refinancings be treated as part of a single issue so long as "the final stated maturity date is no longer than the later of 40 years after the date of issue or the latest date reasonably expected to be required to carry out the governmental purpose of the issue."
Also, SIFMA said the remarketing of converted bonds should be done at a premium that can pay off "costs of issuance, qualified hedge termination fees, qualified guarantee fees, or to fund a reasonably required reserve or replacement fund."
Governmental issuers applauded the letter, and are planning to issue their own letter to Treasury in support of the recommendations this week, said Susan Gaffney, federal liaison director for the Government Finance Officers Association.
"We're very supportive of the technical suggestions provided by SIFMA because they provide greater flexibility for issuers under current market conditions," she said. q
