Buyback For ARS Extended

WASHINGTON — State and local governments will be able to buy and temporarily hold their tax-exempt bonds, including auction-rate securities, for another year without causing the bonds to be considered reissued for tax purposes, the Internal Revenue Service said yesterday.

In a five-page notice, the IRS extended the expiration date for temporary rules allowing issuers to buy and hold tax-exempt ARS, variable-rate bonds, and commercial paper from Dec. 31 of this year to Dec. 31, 2010.

The extension was authorized "to facilitate liquidity and stability in the tax-exempt bond market in recognition of some continuing credit enhancement and liquidity constraints in this market," the IRS said in the notice.

Muni market participants said the move was expected but still appreciated, given that the credit markets remain relatively frozen.

"The credit market conditions that have existed have not totally thawed, so this temporary relief ... is extremely welcome," said Jeremy Specter, a partner at Mintz Levin Cohn Ferris Glovsky and Popeo PC. "This gives state and local governmental issuers additional time to secure liquidity so they can remarket their short term debt."

"It would be nice if they made the rules permanent, but I'll take as my Christmas gift a one-year extension," said David Caprera of Kutak Rock LLP.

Michael Decker, co-head of the municipal securities division at the Securities Industry and Financial Markets Association, said the extension will most likely benefit ARS issuers who have not been able to convert or refinance out of those securities.

"It's not a real large volume of bonds, but if you're one of those issuers, it's a continuing headache if the auctions continue to fail and you have an inordinately high penalty rate on the bonds," he said.

The Treasury Department has now twice extended the expiration date for the temporary rules, which permit issuers to buy and hold bonds for up to 180 days without the bonds being considered reissued. If they were reissued, issuers would have to repeat a complicated set of arbitrage and other tax-related tests on the bonds.

The Treasury initially released guidance in March 2008 that permitted issuers to temporarily buy and hold ARS. The guidance came in response to the collapse of the ARS market after the major bond insurers were downgraded and auctions began to fail. The Securities and Exchange Commission had determined that issuers could bid on and purchase their own auction-rate securities to avoid a failed auction, without triggering SEC enforcement action if certain information was disclosed. Under the IRS guidance, issuers could buy and hold their bonds, provided the bonds were purchased by Oct. 1, 2008.

The Treasury later extended that deadline by 15 months to Dec. 31, 2009. Citing continued struggles in the ARS market, as well as the fact that liquidity and stability problems had spread to other sectors of the bond market, the notice also expanded the reach of the guidance to variable-rate demand bonds and short-term commercial paper.

That notice also allowed issuers to refund the bonds they had purchased by issuing refunding bonds, tendering them in a qualified tender right, or otherwise reselling them.

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