NABL Asks Treasury to Update Guidance on Reissuance

The Treasury Department should draft reissuance regulations that go beyond the two previous notices on auction-rate securities, and they should clarify how reissuance rules pertain to other sections of the tax code and give issuers more flexibility in some areas, the National Association of Bond Lawyers said in a letter to Treasury.

The letter, dated July 10, and 13 pages of comments come as the Treasury Department begins to adopt two notices on reissuance, 2008-41 and 2008-15, into proposed regulations. The notices were released earlier this year in response to turmoil in the auction-rate securities and bond insurance market, but John J. Cross3d, an attorney with the Treasury's office of tax policy, said at a NABL conference in February that the department eventually planned to turn them into proposed Internal Revenue Service regulations.

Due to problems in the auction-rate and bond insurance market areas, muni market participants had requested clarification from the Treasury on whether they could convert auction-rate bonds or issue new bonds without retaining bond insurance without causing a reissuance of the bonds, which could result in several negative consequences for the issuer.

However, Carol Lew, a shareholder at Stradling Yocca Carlson & Rauth in Newport Beach, Calif., who was a member of the working group that drafted the letter, said NABL had established a committee to recommend that Treasury update its reissuance guidance, which, prior to the release of Notice 2008-41, was defined by a 1988 notice.

"The existing guidance in this area was old," she said. "There were new, more modern problems that had emerged."

Tom Vander Molen, a partner at Dorsey & Whitney LLP in Minneapolis who also was part of the group, said Treasury is aware of many of the issues in the letter, but NABL wanted to put all its recommendations in a single letter.

"I don't think much of this is going to come as a surprise to Treasury," he said. "It's kind of nice to put the comments in writing and clearly set out what the problems and issues are, and what our recommendations are."

Two key issues in the letter, Lew noted, involve expanding the scope of the notices to additional sections of the tax code, and providing for greater flexibility in issuing refunding bonds.

While the notices pertained to sections 103 and 141 to 150 of the tax code, which describe the general operating rules for tax-exempt bonds, Lew said some other areas would benefit from reissuance guidance as well.

"There are certainly 'collateral' code sections that we have to deal with constantly in this area," she said.

Specifically, the letter asks Treasury to expand the regulations to include sections providing rules on whether bond interest is subject to the alternative minimum tax and when certain bank deductions are permitted.

Second, NABL is asking Treasury to permit more issuer flexibility when it comes to issuing refunding bonds to cover the costs of buying back debt.

"When the ARS crisis occurred in the springtime, lots of issuers couldn't get their refundings done quickly enough," Lew said, forcing them to suffer high interest rates and failed auctions. As a result, "bond counsel has been peppered with questions" from issuers seeking to buy back their auction-rate debt quickly, and then issue refunding bonds to reimburse themselves at a later date.

Notice 2008-41 permitted issuers to issue refunding bonds within six months of the buying of old debt, but NABL is urging Treasury to go further than that and make the provision permanent.

Specifically, it is recommending that Treasury permit the later refundings for up to 18 months so long as the issuer announces the intention to reimburse itself within 60 days of acquiring its bonds.

"[The recommendation is] basically allowing more flexibility," Lew said. "We don't believe this is abusive, if anything we're taking tax-exempt bonds off the market."

Another important section of the letter, according to Lew and Vander Molen, is a request for clarification on how to determine bond yield when the bonds are held by an issuer or conduit borrower. Currently, NABL says it is "unclear" what the effect on yield is when an issuer or borrower buys its own bonds, with "significant potential ... for overstating or understating the yield on the bond issue."

"That's an area [where] we're doing deals without clarification. It'd be nice to know," Vander Molen said.

Since an issuer or borrower is effectively making yield and principal payments to itself during the period it owns its debt, NABL recommended that that period be effectively ignored for calculation purposes, and the payments be considered neither payments nor receipts.

Other recommendations in the letter include a request that Treasury adjust its requirement that issuers make a "best effort" to remarket their debt to include "some reference to reasonability," according to the letter.

NABL said that the current language could lead some issuers to think they must do everything possible to remarket the bonds, even if it is commercially impractical.

Clifford M. Gerber, a lawyer at Sidley Austin LLP in San Francisco who co-chaired the group, said: "NABL is welcoming the opportunity to continue this discussion" with Treasury.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER