New-issue prices for Build America Bonds remain a hot topic among municipal market participants, as several market groups last week were weighing asking the Treasury Department for clarification on the subject.
The lack of clarity on American Recovery and Reinvestment Act provisions relating to BAB premiums, coupled with heightened Internal Revenue Service interest in the initial pricing of BABs, has caused a lot of concern on issue prices, though no consensus has emerged as to the proper way to address the matter.
Late Friday, several muni market groups were considering drafting a letter to the Treasury asking for immediate interim guidance on the question, to alleviate market participants’ concerns as they go forward with transactions.
The department was said to be considering releasing guidance on the matter early this week, according to sources, but Treasury officials could not be reached.
“Though there are a lot of pieces to the issue pricing problem that likely need further discussion, obviously assistance or discussions with the IRS and Treasury on this matter will be needed,” said Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center.
The ARRA, which created BABs in February 2009, included a provision stating they could not be sold at more than a de minimis amount of premium.
That limit was put in place to ensure that issuers do not artificially inflate the interest rates of their BABs to obtain larger subsidy payments, and issuers who exceed that limit run the risk of losing their subsidy payments.
Traditionally, issue price for bonds is based on the reasonable expectation of the price when 10% of the bonds are sold to the public, but the ARRA is not explicit about whether these tax-exempt bond rules for issue price apply to BABs.
As a result, some market participants believe the tax-exempt bond rules are sufficient, whereas others believe issuers need to wait for more bonds to be sold before establishing issue price.
The debate reached a fever pitch after the IRS in February released a compliance check questionnaire it plans to send to every BAB issuer, which some market participants thought suggested that issuers should be tracking the secondary trading of their BABs even though they are not required by law to do so.
Concerns about the questionnaire prompted calls for clarifications from the Treasury and IRS. Market participants have even aired their concerns to congressional tax writing staff, sources said.
Treasury officials have said they are aware of the concerns and are working on addressing them.
“We would like to get ahead of that topic and would hope in the reasonably near future to try to provide some further guidance in that whole area just so that people can more clearly go forward with transactions knowing what the rules are,” said John Cross 3d, the Treasury’s associate tax legislative counsel, speaking at an April 17 conference on BABs hosted by the Securities Industry and Financial Markets Association.
The call for clarity comes more than halfway through the program’s duration, which was enacted as part of the ARRA.
Without an extension, the program is slated to expire at the end of the year, but the House has already passed legislation that would extend BABs until April 1, 2013, while gradually lowering the subsidy rate to 30% from the current level of 35%.
That bill is now pending before the Senate Finance Committee.
Meanwhile, the National Association of Bond Lawyers sent a letter Friday to congressional staff asking for several technical corrections to the ARRA be addressed in follow-up legislation.
The 16-page letter, sent to John Buckley, majority chief counsel for the House Ways and Means Committee, listed several aspects of ARRA bond programs that could be tweaked to clarify how the law should work, better allow market participants to take advantage of the provisions, or eliminate unintended consequences of the law.
Michael Larsen, a partner at Parker Poe Adams & Bernstein LLP, was the primary author of the document.
