SAN FRANCISCO - The Treasury Department is open to suggestions for modifications to its recently issued notice on reissuance, which it plans to turn into proposed Internal Revenue Service regulations, a Treasury official said yesterday at the National Association of Bond Lawyer's Tax and Securities Law Institute here.
Notice 2008-27, which NABL members generally praised, clarifies that issuers can convert auction rate or other bonds to another interest mode or remove bond insurance without causing a reissuance of the bonds , so long as these changes are authorized in the bond documents. The issue has been a significant concern to muni market participants recently, as enacted or threatened downgrades to bond insurers have driven up interest rates on insured auction-rate bonds, leading issuers to consider a conversion to a more stable interest rate mode.
John J. Cross 3d, an attorney with the Treasury's office of tax policy who participated on a NABL panel yesterday , said the department wanted to make the notice as broadly effective as possible while still completing it in a quick timeframe, and hopes that it addresses all but relatively minor issues.
"In these challenging market conditions, I think Treasury tried to act as fast and comprehensively as possible," he said. "We were aiming to do everything we could at once." This should be viewed as the best the government can do at one time."
He added, jokingly, that any tax lawyers with major criticisms of the notice, "should take a moment of personal reflection, and [consider that], 'Perhaps you're just a negative person.' "
The attorneys in attendance appeared very appreciative of the work Treasury put into promptly issuing the notice, applauding Cross during the session. Perry Israel, who has his own law practice in Sacramento and shared the panel with Cross, praised the notice, saying, "This is a wonderful piece of work. It covers 90%, 95%, maybe more of the issues that are out there. It deals with a lot more [issues] a lot better than I had hoped to get."
Despite the commendation, Israel and fellow panel member Cliff M. Gerber, a lawyer at Sidley Austin LLP in San Francisco, presented a series of questions to Cross regarding specifics of the notice. Israel said they were, "not quibbles, just observations." Cross said he welcomed the comments as "fair game," in an effort to ensure that when the proposed regs are drafted, they address as many concerns as possible.
The two NABL members asked Cross about whether or not inverse floating rates and bonds tied to the Consumer Price Index would eventually be included in the regulations. Both of these interest rate modes are considered objective modes, whereas the notice permits conversion between qualified interest rate modes. Cross said he would consider it for the regulations.
A major part of the discussion revolved around the notice's description of the type of bonds that will qualify as "qualified tender bonds," which would not be subject to reissuance restrictions. Cross said he hopes the definition of the term stated in the notice effectively includes as many types of bonds as possible. He said he wants the definition to include all the bonds that are "normal enough" that they could benefit from the notice.
"It basically endorses the concept that, 'Yes, you can put everything but the kitchen sink' in terms of interest rate modes in your bonds," he said.
Cross also said that the notice changes the duration of bonds that can be considered. Notice 88-130 on reissuance, which was issued in 1988, has been called outdated by groups like NABL. The notice, for example, only covers bonds with maturities of up to 35 years. The new notice extends that to 40 years, because many auction rate bonds have this duration as their nominal maturity.
The Treasury attorney also discussed some of the specific details contained within the notice. He said that if issuers want to replace the bonds with new ones as a means of converting interest rate modes or removing a credit enhancement, they must resell the bonds at par. However, an issuer can sell the bonds at a premium or discount if the bonds are being converted to a fixed interest rate that will last the remaining duration of the bonds.
Israel asked whether the extra funds obtained from bonds sold at a premium would be considered bond proceeds, and whether the discount or premium will be accounted for in the yield of the bonds. Cross said those issues have not been specifically considered yet.
Another specific stipulation explained by Cross involved nonrecourse debt, which is debt typically backed by revenues from the project it is financing. The notice clarifies that as long as the payment expectations of the bonds are maintained through a conversion, they will not be considered "significantly modified," which would result in a reissuance. The bonds cannot move from investment grade to junk grade, or vice versa, as a result of the change.
Cross said this type of debt is most often used for multi-family housing and hospitals.