WASHINGTON – Bond lawyer and dealer groups are drafting revisions to bond documents for market participants to begin using by June 7 when the Internal Revenue Service's issue price rules take effect.
The tax committee of the National Association of Bond Lawyers is drafting a model issue price certificate, Perry Israel, a lawyer with his own firm, told NABL members meeting here Thursday at the group's 15th annual Tax and Securities Law Institute. He is co-chairing TSLI.
Issue price certificates, which underwriters provide issuers, have been used for years and historically have been attached to the tax certificates at transaction closings. But in recent years, as sensitivity has grown over the issue price of bonds, lawyers and underwriters tried to add various sentences and clauses to the certificates.
NABL's tax committee is drafting model language that it hopes everyone will use. Israel said the model certificate has been circulated to NABL's board of directors, as well as SIFMA and the tax-exempt financing committee of the American Bar Association. It could be released as soon as the end of next week and, if not then, certainly later this month, he said.
SIFMA is working on revisions to its agreement among underwriters, the bond purchase agreement, and the notice of sale.
Leslie Norwood, SIFMA's co-manager of municipal securities who was at the NABL meeting, said the dealer group is revising the documents "in an effort to make sure that all of the parties are clear about the issue price rules and their requirements and responsibilities" and that everyone is "on the same page."
Some lawyers at TSLI talked about adding language about issue price to the notice of sale, so that an underwriter bidding on the bonds agrees to certify as to the issue price.
Issue price is important because it is used to help determine the yield on bonds and whether an issuer is complying with arbitrage rebate or yield restriction requirements. It is also used to determine whether the subsidy payments for direct-pay bonds such as Build America Bonds are appropriate.
Under existing rules that have been in place for years, the issue price of each maturity of bonds that is publicly offered is generally the first price at which a substantial amount, defined as 10%, is reasonably expected to be sold to the public.
But tax regulators became concerned that some dealers were "flipping" bonds -- selling them to another dealer or institutional investor who then sold them again almost simultaneously -- with the prices continually rising before the bonds were eventually sold to retail investors. The regulators worried that the "reasonably expected" issue prices for bonds were not representative of the prices at which the bonds were actually sold.
To address their concerns, the regulators adopted a general rule under which the issue price is the price at which the first 10% of a maturity of bonds is actually sold to the public. If 10% of a maturity is not sold, a special rule can be used under which the issue price is the initial offering price (IOP) as long as the underwriters hold at the IOP for five business days after the sale date.
The five-day "hold-the-offering-price" provision is an anti-flipping or an anti-abuse provision. The lead underwriter must certify the IOP to the issuer, as well as provide documentation, such as the pricing wire. Each underwriter in a syndicate must agree in writing that it will not offer or sell the bonds at a price higher than the IOP for five business days after the sale date.
Under a special rule for competitive sales, an issuer may treat the reasonably expected IOP of the bonds to be sold to the public as the issue price if the issuer obtains a certification from the winning underwriter bidder as to the reasonably expected IOP upon which it based its bid. To achieve a competitive sale: the issuer must disseminate the notice of sale in a manner reasonably designed to reach potential underwriters; all bidders must have an equal opportunity to bid; the issuer must receive bids from at least three underwriters "who have established industry reputations for underwriting new issuances of municipal bonds;" and the issuer must award the bonds to the bidder who offers the highest price or lower interest cost.
Issuers have the option of using any of these rules up until the closing (issue) date for their bond transactions.
