As many of you are aware, according to recently released IRS guidance, subsidy payments to issuers of Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Qualified Energy Conservation Bonds (altogether, the "Affected Bonds") will be reduced for any such payment to be received from March 1, 2013, through the earlier of September 30, 2013 or intervening Congressional action.  The aggregate reduction in subsidy payments to issuers of Affected Bonds will be 8.7% of the amount budgeted for such payments but the reduction in any specific subsidy payment to be received remains unclear.  Text of the IRS guidance may be found here.  The reduction in the amount of subsidy payments is a result of automatic cuts in federal spending commonly referred to as "sequestration".  Unfortunately, uncertainty exists in the market regarding the precise impact of the subsidy cut on the rights of issuers and bondholders.

A number of outstanding Affected Bonds provide issuers with the option to redeem such bonds upon a reduction of the direct subsidy payments payable by the federal government.  Whether a redemption of Affected Bonds is in the best interest of an issuer will depend on multiple factors including the specific terms of the applicable redemption provisions, current market conditions and market conditions at the time of issuance of the Affected Bonds.  The language of the redemption provisions (including any premium or "make whole" provisions) must be examined carefully.  For example, some language provides for redemption upon receipt of notice from the IRS that subsidy payments will be reduced, and there are varying opinions as to what constitutes "notice". 

Issuers of Affected Bonds should continue to complete and submit the Form 8038-CP in accordance with the Form 8038-CP instructions which are currently in place.  After submission of the Form 8038-CP, Issuers of Affected Bonds will be notified through correspondence that a portion of their requested payment was subject to the reduction.