Talking about The Thing

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?)

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Negative Interest Rates x Negative Bond Yields = Positive Arbitrage?

Former Federal Reserve Chairman Ben Bernanke recently advised that the Fed should maintain “constructive ambiguity” about the possibility of taking the Federal funds rate below 0% in an effort to simulate the U.S. economy during the next recession.  Given that current short-term interest rates in the United States are at near-historic lows, many believe that it is inevitable that U.S. monetary policy will replicate the negative interest rates employed in Japan and Europe when the next recession hits.  One economist suggests that negative interest rates and negative bond yields (more on that below) are the inexorable conclusion of a trend that began in the late 1400s.  We are on notice.

If the Fed experiments with a Bret Easton Ellis-inspired monetary policy and takes the Federal funds rate to less than zero,[1] what are the potential consequences for issuers of tax-exempt bonds?  For some speculation (and to see the text of the first footnote), hit the jump.

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When Summer Reading and Public Finance Tax Intersect – Tax-Exempt Bonds, Pop Culture, and the Town of Windthorst

Early in my career, I learned to dread telling people that I was a lawyer because when I explained the niche practice of public finance tax law, their eyes started to get sleepy, then their eyes started to glaze over.  That was usually when I would blurt out “I help finance airports, hospitals, schools, and infrastructure across the country.”  So when I came across the D Magazine article, The Tiny Town Bankrolling Texas Institutions during my summer beach reading,[1] I nearly spilled my Aperol Spritz[2] all over my Excel spreadsheets.

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Moving on from LIBOR

The IRS has issued proposed regulations that allow issuers to replace LIBOR rates associated with their bonds and swaps without triggering a reissuance of the bonds or a deemed termination of the swaps. The replacement rate must be a “qualified rate,” which includes the Secured Overnight Financing Rate (“SOFR”). A rate isn’t a “qualified rate” unless the fair market value of the bond or swap is the same before and after the replacement, taking into account any one-time payment made in connection with the switch. Although they’re only proposed regulations, issuers can apply them immediately.

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Taxable Advance Refunding Bonds and the World’s Most Boring Ice Cream Cone

Taxable debt tempts us to put the Internal Revenue Code back on the library shelf and the tax lawyers back into their pen. But if you use taxable debt to refund tax-exempt debt, or if you might ever refund that taxable debt with tax-exempt debt, then we regret to inform you that we ought to be involved.  In a series of posts, we’re going to take a look at some of the questions and complications that arise when issuers and borrowers incorporate straight taxable debt into the same lineage as tax-exempt debt. First up: a taxable advance refunding of tax-exempt bonds.

It might seem odd that an issuer would consider issuing taxable debt, which generally has a higher interest rate than tax-exempt debt, to fund a long-term escrow at the low reinvestment rates that have prevailed for the past 15 years (what fancy folks call “negative arbitrage”) to retire tax-exempt debt. In certain rate environments, such as the present, where shorter-term interest rates applicable to refunding escrow securities are almost equal to the longer-term interest rates that apply to the refunding bonds, it can make sense.  The prohibition against the issuance of tax-exempt debt to advance refund tax-exempt bonds enhances the incentive to issue taxable advance refunding bonds in this type of interest rate market.

When you’re assembling the working group to issue the taxable advance refunding bonds, you might be tempted to ignore the tax-exempt bond rules and the public finance tax lawyers on your team. Don’t. Let’s discuss why.[1]

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Senate Carbon Capture Bill Gains a House Companion

Earlier this month, we described Senate Bill 1763, which would authorize a new type of exempt facility bond to be issued for “qualified carbon capture facilities.” Well, on July 19, 2019, freshman House Republican Tim Burchett of Tennessee proposed the Carbon Capture Improvement Act, H.R. 3861, the text of which is identical to the Senate Bill.[1]  However, unlike the Senate Bill that has bipartisan sponsorship, Burchett is (for now) the sole sponsor of the companion House Bill.

This isn’t the only carbon capture-related bill with both Senate and House support. The Senate has already passed the Utilizing Significant Emissions with Innovated Technologies Act, nicknamed the “USE IT Act.”  The USE IT Act supports the development of carbon capture technology through the establishment of: technology prizes, research and development programs to promote existing and new technologies for the transformation of carbon dioxide generated by industrial processes, a carbon capture, utilization and sequestration report, permitting guidance, and regional permitting task force, among other things, research into carbon dioxide utilization and direct air capture, to facilitate the permitting and development of carbon capture, utilization, and sequestration projects and carbon dioxide pipelines. The USE IT Act similarly has a House counterpart, H.R. 1166, which has been referred to the House Subcommittee on Water, Oceans, and Wildlife. With carbon capture technology on Congress’ mind, and companion bills for tax-exempt bonds for carbon capture facilities pending in the House and Senate, the chances for a legislative change seem to be growing stronger.

[1] If you’re one of those people needs to see it to believe it, click here to see a blackline of the House Bill against the Senate Bill.

SLGs Window to Reopen! And Another Change.

Treasury has announced that, after what seemed like a forever long hiatus, effective August 5, 2019, at 12:00 noon eastern, it will reopen the SLGs windowTreasury can reopen the SLGS window because of the enactment of the Bipartisan Budget Act of 2019, which suspends the application of the federal debt ceiling until July 31, 2021.

But as usual, Congress giveth, and it also taketh away.  Although the sequestration of federal subsidy payments on direct pay obligations, such as Build America Bonds, was supposed to end on September 30, 2027, the Bipartisan Budget Act of 2019 extends it by another two years until September 30, 2029.

As a reminder, the sequestration rate changes each federal fiscal year. Since sequestration began in 2013, the sequestration reduction rate that applies to subsidy payments on direct pay bonds has followed a more or less downward trajectory. It started at 8.7% for the federal fiscal year ending in 2013, but for issuers requesting subsidies for direct pay obligations during the federal FYE 9/30/2020, the sequestration rate is 5.9 percent.

 

A Lesson Plan in Linguistics and Statistics for Well-Endowed Private Universities

Contrary to its name, The Tax Cuts and Jobs Act resulted in a tax increase for certain entities. For example, certain well-endowed private universities and colleges are now subject to a 1.4% excise tax on their net investment income. This tax increase is set forth in Section 4968 of the Internal Revenue Code, and it generally applies to private universities that at the end of their prior taxable year (a) had at least 500 full-time, tuition paying students, and (b) whose endowment (i.e., assets not used for the university’s exempt purposes) had a fair market value that equaled at least $500,000 per student of the university. In addition, Section 4968 only applies if more than 50% of the tuition-paying students at the private university are located in the United States. Since Section 4968 is a brand-new statute, private universities had many unanswered questions regarding which universities are subject to the new excise tax and how to calculate it. Accordingly, the Treasury Department recently released proposed regulations that provide some guidance on these matters. Continue Reading

Carbon Capture Legislation – Potential for a New Type of Exempt Facility Bond

On June 10, 2019, Senators Michael Bennet (D-CO) and Rob Portman (R-OH) introduced Senate Bill 1763 (the “Carbon Capture Bill”), which, if passed, would allow the issuance of exempt facility bonds for “qualified carbon dioxide capture facilities.”  The Carbon Capture Bill has bipartisan support as this bill encourages continued use of carbon-generating natural resources by providing a new tax-exempt financing option for capital expenditures related to a green countermeasure – carbon capture and sequestration. If this sounds like Groundhog Day, that is because it is – this bill was also proposed in 2017. During its last time at bat, the bill was up for consideration while tax-exempt private activity bonds were also on the chopping block – so it was highly unlikely that it was going to pass. Now, with infrastructure and climate change on Congress’ mind, the Carbon Capture Bill seems like it might be a viable candidate.  For more on how this would work, read on.

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IRS Notice 2019-39: Corrected!

On May 22, 2019, the IRS issued IRS Notice 2019-39  (the “Original Notice”), which sought to bring efficiency and uniformity to guidance on the current refunding of certain bonds issued under current and future “targeted” tax-exempt bond programs. While the Original Notice set forth helpful guidance on the tax-exempt current refunding of bonds issued under a targeted bond program, it also created some confusion regarding the tax-exempt current refunding of build America bonds (which everyone was already doing), as Mike and Cindy noted last week.

The Original Notice included build America bonds within the scope of its guidance, which seemed odd because build America bonds were not subject to volume cap, although similar to the targeted bond programs, there was a deadline for issuing build America bonds on December 31, 2010. Additionally, because build America bonds already were required to satisfy the requirements for issuance of tax-exempt bonds, no ambiguity existed regarding the ability to currently refund build America bonds with tax-exempt bonds. This guidance seemed unnecessary and, if read in a certain light, could have led to absurd results.

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