In the seven months since the Internal Revenue Service revamped its tribal economic development bond program to boost issuance and help spur job creation, it appears the program has yet again faltered.

Since July 2012, when the IRS announced its intent to overhaul the TEB allocation process to reallocate $1.8 billion of available bond volume cap, only nine applications totaling $233.4 million, or roughly 13%, have been awarded by the agency. The IRS could not disclose the actual number of applications approved, but the amount totaled $214.7 million.

“The allocation process described in Notice 2012-48 was designed to award TED bond issuance authority to shovel-ready projects where the financing can close in six months or less,” said Steve Chamberlin, acting director of the IRS tax-exempt bond office. “It is not too surprising that tribal governments with prospective projects have needed a little time to prepare applications meeting the new criteria. We are encouraged to see applications requesting TED bond volume cap awards coming in and remain optimistic that the new process will be successful in helping qualified projects secure tax-exempt financing.”

Townsend Hyatt, a partner at Orrick, Herrington & Sutcliffe LLP in Portland, Ore., said the new IRS guidelines adopted last summer were “a step in the right direction towards making sure TED bond allocations go toward viable projects.”

Hyatt said his firm is working on several refinancings that will likely include some TED bond components.

“By all accounts, there hasn’t been a rush of TED bond applications yet,” he said. “Nonetheless, we’ve seen renewed interest from tribal borrowers in TED bonds or TED loans since the process reopened. However, the new 180-day forfeiture rule means that tribes are waiting until later in the deal structuring process before applying for TED bond allocations.”

Under the rule, a tribal government would have to issue TED bonds or obtain a TED loan within 180 days of receiving the allocation or else lose the allocation.

The American Recovery and Reinvestment Act created TED bonds and authorized $2 billion of them to be issued in 2009 and 2010 to promote economic development on tribal lands.

That legislation temporarily removed the requirement that tribal bonds only be used to finance projects with an “essential governmental function” like schools or sewer system projects, but said they had to be on reservations and not involve gambling.

Tribal governments have long complained they are held to higher standards for bond issuance than state and local governments, which have no such restriction on their bond issuances.

The IRS allocated the $2 billion in two tranches — $1 billion in September 2009, saying no tribal government would get an allocation of greater than $30 million and $1 billion in February 2010, with the provision that those bonds had to be used by the end of 2011 or they would be forfeited.

Although the entire $2 billion was allocated, less than 3% of the bonds were ultimately issued through the end of 2011, according to the Treasury.

The IRS consulted with tribes and received “constructive feedback on causes of the low issuance rate,” said Sarah Ingram, IRS commissioner with the Tax Exempt and Government Entities division, during a Senate Finance Committee hearing on May 15, 2012.

“Among other reasons, tribes have stated the low issuance rate was due to the allocation period being too short, the new bond characteristics not being readily understood, credit constraints that impede access to the market for tribes, and the national economic environment not being conducive to new bond issuances,” Ingram said in her written testimony.

In December 2011, the Treasury Department published a 15-page report making recommendations to Congress to help Indian tribal governments access the capital markets more effectively and efficiently. The Treasury pointed to credit challenges facing tribal governments as the primary reason for a lack of issuance.

“A more flexible framework for tax-exempt bond financing cannot ameliorate the significant credit challenges facing Indian tribal governments that impede their access to the tax-exempt bond market,” the report said. The Treasury urged the “essential governmental function” restriction be removed for TED bonds on a permanent basis.

Of the few tribes that have issued TED bonds, most were cautious about taking on new debt.

In March 2012, the Quechan Tribe of the Fort Yuma Indian Reservation in California and Arizona issued $29.685 million of tax-exempt TED bonds.

The 3,500 member tribe used the bond proceeds to refund a portion of some 2008 bonds, pay off a 2008 tribal loan and put money in the debt service reserve fund. The bonds were not rated but had parity debt outstanding rated B- by Fitch Ratings.

The bond sale resulted in a 525 basis point reduction in the tribe’s interest rate and ultimately saved the tribe more than $1.5 million in savings, according to Brad Langner, senior vice president in public finance with Piper Jaffray, which was underwriter for the deal.

Langner said he expects to see more activity in the tax-exempt bond market with Indian tribal governments. Echoing the Treasury and IRS, Langner said road blocks for tribes have consistently been creditworthiness and high interest rates on the tax-exempt side.

“You have to get the tax-exempt interest rates to be compelling enough over a bank deal,” Langner said. “Bank deals are shorter in duration. The strongest deals are getting done at extremely aggressive levels at 2% to 3% for five to seven years.”

Randy DelFranco, a partner at Holland &Knight, said part of the problem with the TED bond program is that, for many tribes who would be able to issue debt with good creditworthiness, most of their revenues are generated through casino operations.

There hasn’t been a lot of economic expansion with tribes, DelFranco said. In the few cases where tribes have financed new operations, they have mostly been with taxable bonds, or have been refinancings and restructurings.

He expects tribes will use TED bonds this year in connection with refinancings.

Mike Lettig, executive vice president and national executive for Native American Financial Services and Agra Business with KeyBank, said the TED bond program has failed to be robust due in part to what he calls an “underwriting gap.”

“There is a gap in developing underwriting criteria that creates access to capital to the tribes that need it most,” Lettig said. “Most tribes that have a desperate need for economic development capital also face economic challenges in supporting debt structures. The largest impediment in actually getting this capital deployed is that they can’t historically demonstrate debt service capacity assurance.”

By and large, tribes are poor and have had difficulty demonstrating they can pay debt service, he said. Predominantly the projects tribes create are designed to meet the needs of their communities and are typically designed to break even without generating much revenue.

“The financial community just doesn’t have the appetite to underwrite this,” Lettig said.

Michelle Wellington, controller with Wildhorse Casino and Resort, at the Confederated Tribes of the Umatilla Indian Reservation in Pendleton, Oregon, said the tribe was awarded $22.56 million of TEDs in 2010 to help finance a portion of its casino property.

In 2010, interest rates plummeted and there was ultimately no cost benefit to issuing tax-exempt bonds versus obtaining a loan from the bank, Wellington said.

As a result, the tribe put its project on the back burner and hired Jeff Lamb, a principal at Sovereign Finance LLC, to help it with its project. Lamb told tribal officials they were eligible to use Build America Bond subsidy payments under the TED bond program.

The WRC hasn’t planned any future projects and as a result didn’t bother looking at the new and improved TED bond allocation process.

“We didn’t want to take on any more debt,” Wellington said. “Right now, tribal gaming revenue is either stabilized or going down in some areas in the economy. Even if you get a bond, you still need a letter of credit. It’s not a real good time to borrow whether you are getting a bond or a bank loan. A lot of tribes have debt and are not comfortable with acquiring more until things change.”

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