The financial crisis - which led to Lehman Brothers' bankruptcy filing and virtually locked up the variable-rate demand obligation market along with the auction-rate securities market - has led municipal issuers to question how to calculate bond yield for arbitrage purposes in these extraordinary situations.

Lehman's bankruptcy filing is leading to the termination of interest rate swaps that the firm had entered into with muni issuers, causing issuers to make termination payments and to question how those payments should be taken into account in calculating bond yield, according to bond lawyers.

As a lack of buyers and high interests have plagued the ARS and VRDO markets, issuers have been buying back these obligations and holding them, leading to questions about how bond yield should be calculated during these holding periods, bond attorneys said.

The National Association of Bond Lawyers is considering asking the Treasury Department for guidance on these issues, they said. Treasury officials could not be reached for comment.

However, the degree to which issuers are currently concerned about these issues depends on the impact that the financial crisis has had on them, said David Caprera, a partner at Kutak Rock LLP in Denver.

"With [current high interest rates], the borrowers don't ask, 'What does the tax law permit?' They are all too busy asking, 'Where do I get the money for the next payment?' " he said. "The markets have to stabilize before all the tax niceties will have any real meaning."

In addition, the urgency in the VRDO market has been tamped down by the Treasury Department's notice Wednesday, extending until the end of next year the time during which issuers can hold ARS and expanding the securities they can purchase and hold to include VRDOs and tax-exempt commercial paper.

In the notice, the Treasury clarified that issuers of these obligations can buy them back and hold them for up to 180 days, or until Dec. 31, 2009, without causing a reissuance or retirement of the debt. The deadline had been Oct. 1, 2008.

"It was obvious that they were trying to get it out the door by Oct. 1," said Linda Schakel, a partner at Ballard Spahr Andrews & Ingersoll LLP here, who praised Treasury's efforts in the unending crisis. "But there are still a lot of questions to be answered."

One bond lawyer, commenting on swaps, said that normally, termination payments are spread out over the remaining term of the bonds as additional payments by the issuer, raising the bond yield and lowering arbitrage.

However, Schakel said that extreme circumstances have led some to question if new, special rules are needed.

"There are tax rules there, but they were written in sort of a void," she said. "I think they anticipated if swaps were terminated, it's because the parties wanted the swap to be terminated, not because Lehman was going under ... Treasury might say 'We can look at this as an entirely different situation with different rules.' "

On VRDOs, Tom Vander Molen, a partner at Dorsey & Whitney LLP in Minneapolis, said that there are questions about how issuers should take interest rates into account on these notes after they have purchased them and are technically paying interest to themselves.

"There's not a clear answer to that," he said. "Is it considered zero? Can you ignore it during the period that you own it? Or can you take into account the market rate?"

In a July letter to Treasury, NABL argued that the period an issuer holds their own obligations should be ignored when calculating yield, but Treasury has not definitively weighed in on the issue, Vander Molen said.

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