The Treasury Department and Internal Revenue Service have announced that they will use lower-rated securities to establish the daily credit rate for municipal tax-credit bonds, which should make the bonds more attractive to investors because they will get a bigger tax credit.
The agencies made the announcement in a notice issued last week that took effect on Jan. 22. Tax-credit bonds are taxable bonds that provide investors with a tax credit in lieu of tax-exempt interest.
In their notice, the Treasury and IRS stated that they are basing their determination of the daily credit rate for tax-credit bonds on taxable bonds with ratings ranging from single-A to triple-B from various market sectors.
The notice marks a departure from the previous Treasury practice of basing the daily rate on bonds rated double-A.
"They're trying to reflect the kind of security that these tax-credit bonds are likely to be ... [They are] more comparable to something in the range of A to triple-B," said Frederic J. Ballard Jr., a partner at Ballard Spahr Andrews & Ingersoll LLP.
The changes will likely work to the benefit of issuers because there will be more demand for the tax-credit bonds, Ballard added.
When the credit rate on the bonds was established by comparing it to double-A rated taxable securities, the credit rate was relatively low because it was based on bonds that had less risk.
Market participants complained that those credit rates meant that issuers would have to either sell the bonds at a discount or pay additional interest to investors. Treasury hopes the higher credit rate resulting from the lower-rated taxable bonds will allow issuers to sell tax-credit bonds at par.
The notice says issuers should use the credit rate for the day the bonds are sold. The rate is published daily by the Bureau of Public Debt on its Internet site for state and local government series securities at www.treasurydirect.gov.
The credit rate will apply to all existing taxable tax-credit bond programs, including qualified forestry conservation bonds, new clean renewable energy bonds, qualified energy conservation bonds, and qualified zone academy bonds, as well as Midwestern tax-credit bonds.
