Help has arrived for many municipal market participants, courtesy of the Internal Revenue Service.  The IRS recently issued guidance that significantly affects strategies for restructuring outstanding auction rate bonds (ARBs), which typically are bonds with a long-term nominal maturity for which the interest rate is reset through a Dutch auction.  If you issue ARBs or borrow proceeds from the issuance of ARBs, the IRS guidance will be important to consider when evaluating strategies to restructure your ARBs to minimize your interest expense.

The new IRS guideline—Notice 2008-27—supplements prior guidance in Notice 88-130.  The new Notice qualifies ARBs for the no-reissuance rules of Notice 88-130 for qualified tender bonds (QTBs), a point which was much-debated among tax lawyers.  Notice 2008-27 also states that changes to QTBs outside the specific rules of the earlier Notice will be tested under the definition of "significant modification" in Treas. Reg. §1.1001-3, which provides objective standards related to changes in yield, payment schedule and security for determining whether modifications to the terms of a debt instrument will be treated as causing a "reissuance" of the modified instrument in exchange for the unmodified instrument. In addition, the new Notice contains a number of special rules and examples, including an example indicating that an outright exchange of bond certificates will not necessarily be treated as a reissuance if there are no significant differences in bond terms.  This example allowed an exchange of uninsured bonds for outstanding insured bonds, when the credit difference was not considered significant under the standards set forth in the new Notice.

For a detailed analysis of Notice 2008-27 and a comparison of that Notice to the earlier Notice 88-103, click here.

Ballard Spahr's Public Finance Group is working nationwide with our issuer, borrower, investment banking and other clients in analyzing and implementing a variety of potential alternatives for outstanding ARBs and other insured municipal bonds. 


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