WASHINGTON - Some market participants want the Treasury Department and Internal Revenue Service to clarify their new proposed issue price rules, particularly regarding certifications that underwriters would make under the proposal.
"There will undoubtedly be more comments in this second round of the process to fine tune the language," said Todd Cooper, a partner at Squire Patton Boggs.
Under the new proposal, released Tuesday, the issue price of a maturity would generally be the first price at which 10% is actually sold to the public. A 2013 proposal that would have had issuers using a 25% threshold was withdrawn after market participants objected.
The re-proposed rule provides that, if 10% of a maturity hasn't been sold by the sale date, issuers could use an alternative method to determine issue price, under which they could use the initial offering price to the public as of the sale date as the issue price if certain requirements are met.
Those requirements include that the underwriters fill all orders from the public on or before the sale date at the initial offering price, and that the lead or sole underwriter provide a certification that no underwriter will fill an order from the public after the sale date and before the issue date at a higher price than the initial offering price, unless the market moves after the sale date. Underwriters should document an order that's higher than the initial offering price by including both pricing information and information regarding the corresponding market change, such as proof that there were changes to the values of a muni interest rate index, Treasury and the IRS said.
Scott Beardlsey, head of public finance at Crews & Associates, said that the certifications seem doable but could be clarified. He said he might only sell bonds at a higher price than the initial offering price after pricing and before closing if the market moved very significantly, since proving the market moved could be "subjective."
Michael Marz, vice chairman at FirstSouthwest, said it would be ideal for Treasury and the IRS to clarify that underwriters will have flexibility in showing how the market moved. Underwriters can't only have to use pure mathematic approaches to demonstrate market movement, he said.
The lack of flexibility could put a burden on underwriters, which could cost issuers. Underwriters' uncertainty over whether the market moved could lead to some bonds not being sold after pricing and before the settlement date, Marz said.
Cooper also said that underwriters holding unsold bonds until after closing could be an "unintended consequence" of the certification requirement.
"Even without a change in interest rates, no market is perfectly priced beyond a snapshot at a moment in time," he said. "As an example, why shouldn't an underwriter who priced a particular maturity at 101 on the sale date and is unable to sell any of that maturity that day, not be allowed to sell them at 101.2 to an ultimate purchaser a week later but before closing even without a change in interest rates. This is a disincentive to the underwriters to respond to the economic realities of the market."
Carol Lew, a shareholder at Stradling Yocca Carlson & Rauth in Newport Beach, Calif, wondered if underwriters would feel a need to consult with bond counsel before selling bonds at a higher price than the initial offering price.
"How's the underwriter going to feel comfortable" that it's not going to make a mistake? Lew asked.
While market participants had some concerns with the new proposal, they preferred it to the rules Treasury and the IRS proposed in 2013. That proposal, which was withdrawn, provided a safe harbor which would allow issuers to treat as the issue price the first price at which at least 25% is actually sold to the public.
"I definitely think it's a plus from the original proposal," Marz said.
Ben Watkins, director of the Florida Division of Bond Finance, said, "I like what I see so far."
Thomas Enright, senior vice president of the capital markets division at David A. Noyes, said he would not have been a big fan of the 25% safe harbor but is fine with the new proposal. The new proposal mainly affects dealers that mark up entire maturities of bond issues, but he said he doesn't do that.
Jonas Biery, debt manager of the city of Portland, Ore. said the proposal "seems to be a move to a more reasonable strategy."
Still, Biery said he isn't sure that small and infrequent issuers will be able to comply with the new proposal without having higher borrowing costs. At least initially, those types of issuers may have to rely more heavily on bond counsel or advisors to comply, he said.
"Issuers, especially, will benefit from being able to more readily meet the issue price guidelines, along with the broader public definition," said Terri Heaton, president of the National Association of Municipal Advisors. "One area that still may need attention is how competitive sales are treated under the new proposal."
