IS THERE A REISSUANCE WHEN THE INTEREST RATE ON TAX-EXEMPT OBLIGATIONS CHANGES DUE TO THE RECENT REDUCTION IN THE MAXIMUM FEDERAL CORPORATE INCOME TAX RATE?
H.R. 1, which was signed into law on December 22, 2017, modifies the Internal Revenue Code of 1986, as amended (the “Code”). One change is to reduce the maximum federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. Other changes impact certain tax-exempt bonds and loans (“Obligations”). This alert will address one of the potential surprises in H.R. 1 for issuers, conduit borrowers and lenders with respect to Obligations that were privately placed with a bank or other financial institution(s).
Under certain circumstances, a change in the lender’s maximum federal corporate income tax rate (“Corporate Tax Rate”) may result in a change in the interest rate per annum on privately placed Obligations. This change may result in such Obligations being deemed reissued for purposes of the Code. A failure to address a reissuance may jeopardize the tax-exempt status of the applicable Obligations.
The provisions of the pertinent financing documents will determine whether the recent reduction in the Corporate Tax Rate triggers an interest rate change on privately placed Obligations. Generally, a change in yield that is greater than 25 basis points can cause a reissuance of the applicable Obligations pursuant to Section 1001 of the Code if:
- the change is not automatic and based on a formula set forth in the financing documents; or
- a rate adjustment provision in the financing documents is waived by the lender; or
- a different interest rate than the one determined by the express terms of the financing documents is negotiated by the parties.
Corporate income tax rate adjustment provisions can vary from one issue of Obligations to another, and may be automatic, discretionary, formula based or non-formula based, requiring careful review of the applicable financing documents. Issuers, conduit borrowers and lenders should work with counsel to determine if an interest rate adjustment has been, or will be, triggered with respect to privately placed Obligations as a result of the recent reduction in the Corporate Tax Rate and if a reissuance concern exists.