Joel Swearingen reported last week that the National Association of Bond Lawyers (“NABL”) recently released exposure drafts of model issue price certificates that reflect the final Treasury regulations on issue price that take effect for tax-advantaged bonds sold on or after June 7, 2017. As Joel reported, the model issue price certificates cover the direct sale of tax-advantaged bonds by an issuer to a purchaser, the public offering of tax-advantaged bonds pursuant to a negotiated sale between the issuer and an underwriter(s), and the public offering of tax-advantaged bonds pursuant to a sale of the bonds from the issuer to an underwriter in a competitive bidding process.

Joel also promised that we would have more to come on the model issue price certificates that NABL released. If I learned anything from my mediocre high school athletic endeavors, it’s that one should never show up, or let down, a teammate. In accordance with Joel’s promise, herewith are some observations on NABL’s model issue price certificates.

  • As one would expect (and hope), the model issue certificates do an excellent job incorporating the provisions of the new issue price regulations.
  • In a public offering of tax-advantaged bonds pursuant to a negotiated sale between the issuer and the underwriter, the model issue price certificates should not be used as a pretext by the underwriter to refuse to give certifications that the underwriter customarily gives, under the guise that the model certificates represent a new “market standard” on the scope of the underwriter’s certifications.
    • For instance, the underwriter in a negotiated sale typically certifies items that derive from the issue price of the issue, such as the yield and weighted average maturity of the issue. This is appropriate because the underwriter in such instances is responsible for structuring the terms of the bonds in a manner that results in the most efficient sale of the bonds to the public.
    • Moreover, the underwriter in a negotiated sale is singularly situated to give certain certifications that are necessary but not included in the model issue price certificates. For example, to be considered a “reasonably required reserve fund” the investment of which is not subject to yield restriction, the establishment and continued existence of the reserve must be a vital and necessary factor in marketing the bonds to the public (see Rev. Rul. 76-462). Only an underwriter in a negotiated sale of tax-advantaged bonds can give this certification.
  • Finally, even though the model issue price certificate for a direct placement of tax-advantage bonds does not include this certification, the purchaser should certify in the case of qualified private activity bonds that are purchased at a discount whether the discounted purchase price constitutes original issue discount.
    • In other words, the purchaser should be able to certify in such instances whether the discounted purchase price arose because the coupon rates agreed to by the issuer and the purchaser are below current market rates, which would necessitate a discounted purchase price on the bond issue so that the yield to the purchaser of the issue matches prevailing market rates.
    • If the discounted purchase price does not constitute original issue discount, than it represents a fee or other compensation to the purchaser that is treated as financed with proceeds of the bond issue (similar to the discounted purchase price an underwriter pays the issuer for bonds that the underwriter will market to the public). Only two percent of the proceeds of a qualified private activity bond issue can finance issuance costs, so a discounted purchase of directly placed qualified private activity bonds can result in more than two percent of the proceeds financing issuance costs if this discount represents a fee to the purchaser, rather than original issue discount.

We might have more on this in the days, weeks, months, or years ahead, but I’m not making any promises.