NABL Seeking Meeting on Bank Loans and Reissuance

WASHINGTON — The National Association of Bond Lawyers has asked to meet with Treasury Department and Internal Revenue Service officials to discuss closing a perceived gap in reissuance guidance that does not cover tax-exempt bonds that issuers privately place with banks.

In a five-page letter sent to the Treasury on Wednesday, NABL president Kristin Franceschi, a partner at DLA Piper LLP in Baltimore, said the group’s board and tax committee would like to talk with regulatory officials “to see whether a non-reissuance solution may be formulated to accommodate what has become an increasingly prevalent form of financing in the municipal marketplace.”

The NABL letter is saying, “we’d just like to talk to you about how to fill the gap,” said Tony Martini, a partner with Edwards Wildman Palmer LLP in Boston and a member of NABL’s tax committee.

There has been an increase in direct bank loans and private placements in recent years, partly due to provisions of the American Recovery and Reinvestment Act, which made it easier for banks to purchase more tax-exempt bonds during 2009 and 2010. Under the provision, banks could deduct 80% of the cost of buying and carrying tax-exempt bonds sold by small issuers whose annual issuance was $30 million or less. The law in effect before 2009 and since the ARRA expired at the end of 2010 required issuers’ annual debt issuance to be $10 or less.

Also, since the financial crisis, banks are reluctant to provide issuers with letters of credit to back variable-rate bonds. Instead, banks have been either making direct loans to issuers, or buying their long-term bonds at short-term rates and holding the debt for two to three years.

But IRS reissuance rules issued in 1988 for qualified tender bonds and guidance issued in 2008 for auction-rate securities does not cover bonds that issuers privately place with banks, NABL members said.

“When the IRS drafted Notice 2008-41, its latest guidance on reissuance, it may not have been contemplating these private placements,” said Michael Larsen, a lawyer at Parker Poe Adams and Bernstein LLP in Charleston who chairs NABL’s tax committee. “As more and more banks are making loans to borrowers containing a bank rate interest-rate mode, we’re concerned about the reissuance ramifications with respect to bonds being converted into or going into a new bank-rate mode.”

Reissuance occurs when significant modifications are made to the terms of a bond so that it ceases to be the same bond for federal tax purposes.

In a reissuance, the modified bond effectively becomes a new bond that is subject to the latest tax law requirements or to tax rules or laws that did not apply at issuance.

An increasing number of issuers are privately placing long-term bonds with banks for two or three years and getting a short-term interest rates, as long as they give the banks the right to tender the bonds back to them after those two or three years. The issuers then can try to resell the bonds to the banks or other banks, or it can redeem the bonds.

But if the interest rate on the bonds changes significantly, then the bonds are considered to be reissued

For example, take the case of an issuer that sold between $10 million and $30 million of bonds during a year and privately placed $5 million of bonds with a bank while the ARRA was in effect.

Now, it is two or three years later and the bank no longer wants to hold the bonds. It tenders them back to the issuer, which wants to sell them to another bank for another short period of time. But interest rates have changed and the bonds would have a significantly higher interest rate. If sold at that higher interest rate, the bonds would be reissued and would no longer be bank-qualified.

The bank would probably not want to buy them because it could no longer get the 80% deduction for carry costs. The issuer would not longer meet the small-issuer limit for bank-qualified bonds.

“In view of the increasing participation of banks as purchasers in the municipal finance market, NABL belives that reissuance guidance to address the instruments used in these financings would be very helpful to market participants,” the group wrote in its letter, which was sent to John Cross, associate tax legislative counsel at the Treasury.

Separately, NABL submitted a three-page comment letter to the IRS on Tuesday suggesting changes to an example the agency used in educational materials on how financial restructurings of facilities or other property by states, localities and nonprofit organizations can avoid tax-law problems.

 

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