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.
Tax-exempt private activity bonds require a public hearing and approval after public notice before the bonds can be issued as tax-exempt. (The requirement originated in the Tax Equity and Fiscal Responsibility Act of 1982, so we’ve given the process the shorthand of “TEFRA.”) In most jurisdictions, citizens are under orders not to leave their homes other than for certain essential activities. Similarly, governmental workers who would be the ones to preside over the public hearing may have been instructed to work from home for the time being. This is a problem, because the current TEFRA requirements insist on an in-person hearing. Telephone or web-based hearings aren’t allowed.
The proposed Notice would fix this by allowing a telephone TEFRA hearing (with optional web access). The phone call would need to be toll-free, and members of the public would need to be able to speak on the call to comment on the project. The dial-in number would need to be included in the required public notice prior to the hearing. In addition, an issuer can use any other means of public hearing that is “determined by the issuer to provide a reasonable opportunity for interested individuals to express their views.” The relief would run through the later of December 31, 2021 or 90 days after the date on which the jurisdiction holding the hearing has no emergency declaration at any level related to COVID-19.
For issuers that have outstanding variable rate debt, recent days have seemed like deja vu all over again. Hearkening back to the 2008 financial crisis, interest rate resets on these obligations have in recent days been astronomically high (although the recent actions by the Federal Reserve have helped with this). One strategy to deal with these unexpectedly high rates is to buy in the debt and hold it. The problem is that when an issuer holds it own debt, it extinguishes the debt for tax purposes. We’ll spare you the details, but the bottom line of this is that, once extinguished, the debt instrument (which is still very much alive) is sure to be taxable going forward.
Under current law, thanks to some lingering guidance from the 2008 crisis in the form of Notice 2008-41 (linked below), an issuer can buy and hold its own qualified tender bonds (as defined in Notice 2008-41) without causing their extinguishment or reissuance, so long as the issuer holds the qualified tender bonds for no more than 90 days and uses its best efforts to remarket the bonds when it comes time to remarket them. In other words, for variable rate debt bearing interest in a weekly interest rate period, for example, the issuer must use its best efforts to remarket the debt at the end of each weekly period. Back in 2008, there were some remarketings that completely failed – no one would buy the debt at any price. The problem with current (or, current as of yesterday) market conditions is that there is a market for many variable rate tax-exempt bonds, but that market is producing interest rates that are too high for issuers to stomach.
If the IRS adopts the proposed Notice in the NABL letter, it would allow issuers to buy and sit on their qualified tender bonds (as defined in Notice 2008-41) and tax-exempt commercial paper (as defined in Notice 2008-88) through the later of December 31, 2021, or ninety (90) days after the date on which no United States jurisdiction remains covered by a state or federal declaration of emergency or disaster related to the COVID-19 Outbreak. The proposed Notice would also extend certain additional benefits from Notice 2008-41, which we commend to your reading.
More to come on all of this.