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Proposed Rules Addressing LIBOR Phase-out Help Ease Reissuance Concerns

Since the 2017 announcement that the London interbank offered rate (“LIBOR”) may be phased out after the end of 2021, the municipal finance industry has been concerned that changes to debt obligations and related financial products necessary to address the phase out could cause an unexpected “reissuance” of the debt for federal tax purposes, which could result in negative consequences for issuers and debtholders.  In response to these concerns, on October 9, 2019, the Department of the Treasury released Proposed Regulations addressing, among other things, whether changes arising out of the end of LIBOR will result in a reissuance for federal tax purposes (the “Proposed Regulations”).

In general, the Proposed Regulations provide favorable guidance that should help avoid a reissuance in most instances.  In particular, the Proposed Regulations provide that, if the terms of a debt instrument or non-debt contract (e.g., a swap) are changed to reference a “qualified rate” in lieu of (or as a fallback to) LIBOR and the change does not change the fair market value of the debt instrument or non-debt contract or the currency of the reference rate, then such change will not result in a reissuance for federal tax purposes.  For example, if the terms of a variable rate bond that has an interest rate based on USD-LIBOR are changed to provide an interest rate based on the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York (commonly referred to as “SOFR”), such change typically will not trigger a reissuance of the bond, so long as the fair market value of the bond remains the same. 

The Proposed Regulations name certain existing rates that are “qualified rates,” but also provide for flexibility to accommodate other rates.   Further, to assist in addressing the fair market value requirement, the Proposed Regulations provide two safe harbors – one based on historic average of rates and the other on arm’s length negotiations – that, if met, will result in the requirements to be deemed satisfied. 

It is expected that, in some instances, changes to address the LIBOR phase out will include “associated alterations” that are reasonably necessary to implement the change.  For example, a party may be required to make a one-time payment to offset the change in value of the debt-instrument that results from the replacement of LIBOR with a qualified rate. The Proposed Regulations provide that changes that fall within the definition of “associated alterations” will not result in a reissuance.  However, other contemporaneous changes (e.g., an increase in the rate to address deterioration of an issuer’s credit) must be analyzed separately and may trigger a reissuance.

The final version of Regulation will likely see changes as Treasury responds to comments on the Proposed Regulations, but the Proposed Regulations evidence a willingness to provide guidance setting a path forward that does not involve widespread reissuances and should help ease some of the concerns caused by the phase out of LIBOR.  A taxpayer may choose to apply the Proposed Regulations to changes occurring on or after October 9, 2019, as long as the taxpayer and its related parties do so consistently. 

© 2020 Bracewell LLPNational Law Review, Volume IX, Number 291


About this Author

R. Todd Greenwalt, Tax Attorney, Bracewell Law Firm

Todd's practice focuses on governmental entities and tax-exempt organizations, advising clients with regard to tax-exempt financings and other business transactions, and resolving tax-exempt status issues.

His clients include all types of state and local governmental entities, hospitals, other health care organizations, colleges and universities, charter schools, museums, arts organizations, community and economic development organizations, private foundations, advocacy groups, and other charities. Todd serves as bond counsel and advises health...

Victoria N. Ozimek, Bracewell, Tax Credit Obligations Lawyer, bond Issuance Attorney

Victoria Ozimek offers legal advice to clients regarding all aspects of tax advantaged obligations, from vetting the tax issues on proposed financing structures to assisting issuers with post-issuance compliance matters such as remedial actions and private business use analyses. In addition to traditional state and local government financings, Victoria has worked on transactions for the financing of multifamily and single family housing, universities and colleges, charter schools, airports and seaports, and water facilities. She has also acted as special tax counsel to a number of issuers in situations where an issuer's regular counsel may not be in a position to provide the specific tax experience needed. 

In addition to advising clients regarding the structuring of transactions, Victoria has assisted issuers with responding to examinations of obligations by the Internal Revenue Service (IRS) and, if necessary, negotiating with the IRS regarding any identified issues. She has also advised issuers regarding the IRS's Voluntary Closing Agreement Program. When needed, Victoria has worked with clients to secure private letter rulings and other guidance from the IRS regarding the tax effect of a proposed action. 

Victoria consistently seeks to provide issuers with the tools needed to successfully manage the requirements imposed by federal tax law by utilizing tax due diligence process as means to communicate with issuers regarding their compliance obligations and regularly seeking opportunities to educate the financing team regarding recent developments. Victoria is the current chair of the Education and Member Services Committee for the National Association of Bond Lawyers and is a frequent speaker on tax matters with respect to tax-advantaged debt.     

Brian P. Teaff, Business Transaction Attorney, Bracewell Law Firm

Brian Teaff has a multifaceted tax practice, advising clients in connection with tax-exempt financings and other business transactions in the public finance area, as well as counseling public charities and private foundations on a wide range of tax planning and compliance matters. In addition, Brian advises a variety of types of clients with respect to the "opportunity zone" provisions enacted under the Tax Cuts and Jobs Act of 2017. 

In his public finance practice, Brian serves as tax counsel on governmental and conduit financings where he...