Given the extreme volatility in financial markets due to the COVID-19 pandemic, there is concern that the global economic uncertainty will significantly affect the tax-exempt bond markets. Congress recently passed the unprecedented Coronavirus Aid, Relief and Economic Security (“CARES”) Act to stimulate the economy with approximately two trillion dollars.
The National Association of Bond Lawyers (“NABL”) drafted a letter to the leaders of Congress on March 22, 2020, while they were considering the CARES Act, and to the United States Treasury and Internal Revenue Service on March 25, 2020, requesting immediate, short-term guidance. However, despite proactive lobbying efforts by the NABL requesting policymakers to provide state and local governments and other tax-exempt organizations with the tools necessary to enable the continued flow of much needed capital in this environment of uncertainty, the proposals have not yet been implemented. Here are a few highlights of NABL’s proposals that would benefit the tax-exempt bond marketplace:
Federal Government Purchases & Guarantees
NABL is calling for the federal government to purchase new issues of tax-exempt bonds and allow state and local governments access to the primary market by creating new funding programs and broadening and making more flexible existing federal programs. NABL also proposes the establishment of a federal guaranty program for tax-exempt bonds and taxable bonds of state and local governments, by establishing a program under a regulation (or notice) or by amending Section 149(b) of the Internal Revenue Code (the “Code”).
Reinstate Tools Effective in the Past and Facilitate Market Access
During the Great Recession, limited-time enactment of the American Reinvestment and Recovery Act (ARRA) and other expired Code provisions facilitated market access for state and local governments in dire need. NABL proposes reinstatement of the Build America Bonds with a direct pay subsidy (Section 54AA and Section 6431), and tax credit bond programs with direct pay subsidy (Section 54A through F and Section 6431), which will allow issuers to efficiently enter the taxable market with a federal revenue stream and lower effective borrowing cost. NABL is also calling for a federal government liquidity facility for qualified tender bonds and commercial paper to stabilize the market and address the inability of state and local governments with outstanding qualified tender bonds or commercial paper to remarket existing bonds.
Reinstate Advance Refunding of Outstanding Debt
NABL is calling for the amendment of Section 149(d) of the Code to permit advance refunding of outstanding debt to allow issuers more flexibility to restructure borrowings.
Expand the Limit for Qualified Tax-Exempt Obligations (Bank Qualified Bonds)
NABL has proposed removing Section 265 bank deductibility limitations for tax-exempt bonds to encourage banks to purchase bonds, particularly newly issued debt. At a minimum, it proposes increasing the cap on the small issuer exception substantially, such as to $100,000,000. For conduit transactions (such as those for non-profits), NABL proposes assessing the limit at the conduit borrower level.
Tax-Exempt Cash Flow Borrowings
NABL also proposes that Congress either pass legislation to permit, or direct the Treasury to permit, long-term cash flow borrowings on a tax-exempt basis with sizing based on potential deficits to address severe cash flow difficulties and uncertain revenue streams of state and local governments. This would provide state and local governments vastly more flexibility as opposed to utilizing the clear expected deficit of a certain size and clearly permitting for expenses by utilizing the extraordinary working capital exception of Treasury Regulation Section 1.148-6(d)(3)(ii)(B). NABL proposes that this relief also provide for no retesting for deficit financings for at least ten and a half years after issuance to handle the unanticipated and difficult-to-predict cash flow issues.
Relax Private Business Test and Private Loan Test
NABL argues that to address unprecedented uncertainty with respect to revenue streams of state and local government and credit concerns, private business tests and private loan restrictions under Section 141 should be suspended or relaxed to facilitate “partnerships” with private enterprise to provide essential infrastructure and allow communities to recover. As an alternative to temporarily removing the restrictions under Section 141 for governmental bonds, private business tests or loan restrictions might be rolled back to the restrictions under Section 103(b) of the 1954 Code. NABL argues that restrictions should be loosened for hospitals, for educational and research entities and for entities that provide housing that have been forced to adapt to rapidly changing operational needs as a result of the crisis.
Reinstate Private Activity Bonds
A new category of private activity bond, similar to previously permitted small issuer bonds under Section 144, could be allowed to revitalize the economic activity of small business, broadening the category of permitted businesses beyond manufacturing companies.
Eliminate the Volume Cap for Low Income Housing
NABL proposes eliminating volume cap restrictions for single-family and multifamily housing projects for calendar years 2020, 2021 and 2022.
Amend Public Hearing Regulations
With the onset of COVID-19, state and local governments are severely limiting in-person gatherings by members of the general public. Many municipalities are prepared to offer public hearings by telephone, with or without online access. The procedural requirements of Section 1.147(f)-1 of the Treasury Regulations (the “TEFRA Regulations”) require “interested individuals to have a reasonable opportunity to express their views.” Guidance in the TEFRA Regulations indicates that the conduct of such hearings without the possibility of in-person attendance may not satisfy the public approval requirements of Section 147(f) of the Code. Therefore, NABL is advocating amending the TEFRA Regulations to allow public hearings that permit access to the general public by toll-free telephone, with or without online access, to be treated as satisfying the requirements of section 147(f) and section 1.147(f)-1, provided that such public hearing is determined by the issuer to provide a reasonable opportunity for interested individuals to express their views. This amendment will ensure new tax-exempt bond issuances are not unnecessarily delayed by the inability to hold public hearings.
Extend Time for Issuers to Market Bonds
COVID-19 is also limiting or prohibiting certain issuers of tax-exempt bonds from refunding or remarketing their bonds, forcing some issuers to buy bonds and hold them for a period of time. The uncertainty regarding the amount of time the COVID-19 outbreak will last and overall lasting effects on the tax-exempt bond markets is forcing issuers to hold their bonds without the confidence that they will be able to successfully remarket them within the 90-day period prescribed by Notice 2008-41 and Proposed Regulation 1.150-3, REG 141739-08; 83 F.R. 67701-67705; 2019-9 IRB 757 published December 31, 2018. NABL seeks to extend the holding period to the later of: (1) December 31, 2021, or (2) 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. By treating a purchased bond as continuing in effect without resulting in a retirement of the bond solely for purposes of section 103 and sections 141 through 150 during such extended holding period, the governmental issuer may refund the purchased bond with a refunding bond, tender the purchased bond for purchase in a qualified tender right in its capacity as a bondholder, or otherwise remarket or resell the purchased bond during such extended holding period.
A link to current NABL activity, including the full text of its transmission to Congress and the IRS, can be found here.
Hancock Estabrook, LLP will continue to monitor legislative and regulatory activity on tax-exempt bonds with respect to COVID-19 and analyze trends in the tax-exempt marketplace to provide our clients with the best tools and information during this period of uncertainty.