WASHINGTON — Some issuers are redeeming their Build America Bonds even as there is uncertainty over how the reissuance rules apply, bond lawyers said.
Squire Patton Boggs LLP attorneys Jackson Browning and Johnny Hutchinson spoke with The Bond Buyer after more Ohio issuers disclosed in recent weeks that they can or intend to redeem their BABs.
BABs are taxable bonds that state and local governments could issue in 2009 and 2010 and receive subsidy payments from the Treasury Department equal to 35% of their interest costs. The payments to issuers were reduced by 8.7% for part of fiscal 2013 and are being reduced by 7.2% in fiscal 2014, which began Oct. 1, because of federal spending cuts known as sequestration. The reductions in subsidy payments have triggered the extraordinary optional redemption provisions in some issuers' bond documents, allowing the issuers to redeem their BABs.
BABs usually aren't redeemed on the same day that refunding bonds are issued, said Browning and Hutchinson. Often, issuers need to give holders of the BABs 30 days notice before redeeming the bonds, and issuers like to issue the refunding bonds before they put out the redemption notice. During the period between when the refunding bonds are issued and when the BABs are redeemed, the refunding bond proceeds are put in an escrow, and debt service is paid only from the money in the escrow, rather than the original source backing them, they said.
Under regulations, a reissuance occurs if there is a "significant modification" to the terms of the bonds. When there is a reissuance, for tax purposes the original bonds are retired and new bonds take their place. One type of significant modification would be a change in what backs the bonds.
The regulations state that defeasance escrows don't cause reissuance in the case of tax-exempt bonds. But BABs aren't tax-exempt bonds, so it is unclear if defeasing BABs causes them to be reissued. Holders of the BABs still accrue interest in the time between when the bonds are defeased and when they're redeemed. It is unclear whether, if the bonds are reissued, issuers can get subsidy payments for the interest BAB holders earn during this period or in the entire period from the last interest payment date to the redemption date, Browning and Hutchinson said.
Some bond lawyers have told issuers to apply to receive the subsidy payments and disclose that the BABs have been defeased. Other bond lawyers have told issuers that there's at least enough of a risk that there's a reissuance of a bond that couldn't receive subsidy payments, so the issuer can't claim subsidy payments for the period between issuance of refunding bonds and redemption of BABs. However, issuers are going ahead with refundings anyway, the lawyers said.
Issuers' savings from refunding the BABs may be greater than the amount of lost subsidy payments. But even if there are only marginal savings from refundings, issuers may want to eliminate the risk of increased or extended reductions in BAB subsidy payments under sequestration. Many of the issuers who are redeeming BABs are smaller issuers who are more familiar with regular tax-exempt bonds, Browning and Hutchinson said.
"IRS guidance on how the reissuance rules apply to BABs would be very helpful," Browning and Hutchinson said in an email. "The IRS has provided guidance saying that many of the general rules applicable to tax-exempt bonds contained in Sections 103 and 141-150 of the [Internal Revenue] Code apply to BABs unless the specific BABs provisions contradict those general rules. Extending this treatment to the reissuance rules is a logical clarification."
In the last two months, several more Ohio issuers have disclosed on the Municipal Securities Rulemaking Board's EMMA system that they can or plan to redeem BABs.
The Avon Lake City School District, in Lorain County, disclosed on July 18 that it intends to redeem $3.78 of BABs it issued in 2010 on Sept. 9. The bonds were issued to finance construction and improvements to school facilities and a high-school athletics stadium. Stifel, Nicolaus & Co. served as underwriter and Bricker & Eckler LLP served as bond counsel.
The Vantage Career Center Joint Vocational District — in Auglaize, Mercer, Paulding, Putnam and Van Wert counties — notified bondholders earlier this month that it will redeem $15.99 million of outstanding BABs on Aug. 8.
The bonds were issued in 2010 and were used to refund bond anticipation notes, pay for the local share of school construction under the State of Ohio Vocational Facilities Assistance Program and finance other improvements to school facilities. Ross, Sinclaire & Associates, LLC, served as underwriter, and Peck, Shaffer & Williams LLP was bond counsel, according to bond documents.
The Columbus City School District, Cuyahoga County Public Library, the Euclid City School District and the Cloverleaf Local School District all have disclosed in separate notices that they are authorized to redeem their BABs. They didn't give dates for refundings.
The Columbus school district issued $14.97 million of BABs in 2009 to pay off bond anticipation notes issued to construct, improve and equip school district buildings. A syndicate led by Ross, Sinclaire underwrote the bonds, and Peck, Shaffer & Williams was bond counsel, according to the BABs' official statement.
The Cuyahoga County Public Library issued $54.96 million of notes designated as BABs to build and improve library system buildings and sites, according to bond documents. Stifel, Nicolaus, KeyBanc Capital Markets Inc. and PNC Capital Markets LLC were the underwriters. Squire, Sanders & Dempsey, now Squire Patton Boggs, was bond counsel.
The Euclid City School District, near Cleveland, issued $21.4 million of BABs in 2010 to finance construction of and improvements to school district buildings, according to the official statement. Stifel, Nicolaus was underwriter and Squire, Sanders & Dempsey was bond counsel.
The Cloverleaf Local School District's $21.82 million of 2009 COPs that were designated as BABs were delivered to finance a new elementary school, according to the official statement. Stifel Nicolaus was underwriter. Squire, Sanders & Dempsey was bond counsel.
