In Part 1, we introduced the cash flow relief technique/staple of your morning commute known as “Scoop and Chuck.” In particular, we discussed an issuer that will issue new bonds and use the proceeds to pay interest (but no principal) on a prior issue of bonds. The new bonds will have a debt service schedule that is pushed out later in time compared to the debt service schedule on the prior bonds. This enables the issuer to keep some of the revenues that it otherwise would have used to pay debt service on the prior bonds. In Part 2, below, we’ll add more facts and try to provide some answers.
The pandemic is forcing even the most frugal issuers to seek to reduce or postpone their debt repayment requirements. There are many ways to do this. Each approach has pros and cons from a business perspective. Not surprisingly, each approach also has tax consequences that are often not intuitive and sometimes downright devilish. We will tackle them one at a time in a series of bite-size (relatively speaking) posts. First up: It’s America’s #1 Morning Zoo Tag-Team Radio Show: SCOOP AND CHUCK!
Please join Squire Patton Boggs on Friday, May 8, at 12 pm Eastern time for a one-hour webinar covering the Federal Reserve’s Municipal Liquidity Facility, the CARES Act, and Chapter 9. Click here to register.
The Federal Reserve has agreed to purchase up to US$500 billion of short-term municipal notes from eligible municipal issuers. Please join us for an update on the Municipal Liquidity Facility’s general terms, who can access and what is provided.
We will continue to review the challenges and benefits of accessing the facility and what changes may be needed.
Here’s the registration link again. We hope you can join us.
As described in our previous post, NABL hasn’t been binge watching Tiger King and binge eating like the rest of us during this time at home during the COVID-19 pandemic. Instead, on March 25, 2020, NABL asked the IRS to adopt a proposed notice that would address two municipal bond concerns caused by the pandemic: (1) the requirement of in-person TEFRA hearings for tax-exempt private activity bonds; and (2) the extinguishment of qualified tender bonds and commercial paper if the issuer of such debt repurchases it without meeting certain requirements.
The general shutdown of the economy in response to COVID-19 threatens businesses in most sectors of the economy, and the revenues that those businesses will lose cannot be taxed by state and local governments, threatening their budgets as well. Lawmakers at all levels are searching for grand gestures and bold new ideas to relieve the extraordinary burdens that COVID-19 is imposing. However, the old and tried – the low-hanging fruit – may be even more useful than the new and untried. Tax-exempt advance refunding bonds were a well-established tool that state and local governments formerly used to save money. They allowed state and local governments to reap the benefits of comparatively low prevailing interest rates even when their outstanding debt could not be redeemed until more than 90 days in the future. Citing concerns (even if only as fig leaf for the real objective of raising revenue) about having two sets of bonds (the original new money bonds and the advance refunding bonds) outstanding concurrently for more than 90 days with but a single project to support them, Congress eliminated most tax-exempt advance refunding bonds in the Tax Cuts and Jobs Act of 2017. What better time than a once-in-a-hundred-years pandemic to restore tax-exempt advance refunding bonds to their rightful place?
If Congress restores them, before the ink on President Trump’s signature is dry, tax-exempt advance refunding transactions will begin to take shape. The municipal bond market is completely familiar with the regulatory rules and business considerations involved. There are no new rules to learn or unintended consequences to consider. Working groups will convene, tax lawyers will be roused from their parents’ basement, and state and local governments can obtain significant cash flow relief using a well-established financing technique.
The IRS has extended to July 15, 2020 the deadline for certain time-sensitive actions for tax-exempt bonds, including filing Form 8038 and paying rebate, if the deadline originally fell on or after April 1, 2020 and before July 15, 2020.
As we’ve said, The Thing touches everything. Indeed, to quote No Country For Old Men: “It’s the dismal tide. It’s not the one thing.” State and local governments are no exception. Our public policy and public finance groups have a four-point action plan for state and local governments to start to pick up the pieces. We’re ready to help.
NABL has asked the IRS to issue a Notice that would allow issuers to hold TEFRA public hearings for private activity bonds by phone and that would allow issuers to purchase and sit on their own debt through the end of the COVID-19 crisis without extinguishing the debt, even if the issuer doesn’t use its best efforts to remarket it.
The text of the proposed Notice is available here. It remains to be seen whether the IRS will make significant changes to the Notice before adopting it or some other form of relief, but some highlights of the request are as follows.
With stories about stimulus and relief from COVID-19 swirling, municipal bond industry groups are springing into action to help Congress and Treasury help us all. NABL sent a letter on Sunday to Congress and Treasury, asking for broad relief on a number of tax topics affected by COVID-19. The request is stated in broad strokes (broad strokes, as in “home run strokes” – be sure to read it), and more details on the specifics are sure to follow.
Importantly, you (yes, You) can help. Please forward the letter (which is linked above and linked again here, to your Senator and Congressperson and request your colleagues and contacts to do the same. You can find your Senator (or someone else’s) here and your Congressperson here. As we noted in our post last week, COVID-19 touches all sorts of tax rules and could cause all sorts of mayhem. It looks like relief is on its way – but, just like we did in 2017, we need to make our voices heard.
While you’re here, check out Squire Patton Boggs’s COVID-19 hub here, for coverage of all kinds.
Yes, The Thing touches everything.
COVID-19 affects the muni bond world in some fairly obvious ways. The general mandate is “everybody do less.” Decreasing activity in general translates to decreased business revenues and decreased tax revenues, which means less money available to repay bonds. This has set the disclosure world ablaze, as securities lawyers ponder what to say to the market about the pandemic. That very practical question is far beyond the bounds of this blog and will be dealt with ad nauseum elsewhere, such as this piece in The Bond Buyer.
There are a few less obvious ways that the disease will affect the tax requirements for tax-advantaged bonds. We’ll look at them in a series of posts. Click through for a teaser. (I guess that makes the previous sentence a meta-teaser?)