Municipal market participants are beginning to ponder when and whether the threat to tax-exempt bonds from the Trump administration will rise to the point of requiring fresh disclosure for investors and underwriters buying the debt.
Despite the high stakes for the $3.5 trillion tax-exempt bond market, many participants are likely to hold off until legislation is enacted, mindful of the unpredictable nature of Congress and past threats to the exemption that have failed.
"Certainly everyone has been thinking about this and has been since the election," said Glenn Weinstein at Miller, Canfield, Paddock and Stone, P.L.C. and former chair of the National Association of Bond Lawyers' Securities Law and Disclosure Committee.
"For now I think most people will rely on the standard exceptions they currently have, which have been worked on for a very long time, because this is not the first time the removal of the tax exemption has been proposed."
Although it's far from the first time that Congress has targeted the tax exemption, many believe
Current disclosure in preliminary official statements typically features boilerplate language outlining baseline threats to the exemption on interest from future federal and state legislation.
A review of documents for two bond sales from Dormitory Authority of the State of New York found no disclosure differences for deals that priced before and after Trump taking office.
"Current and future legislative proposals, if enacted into law, clarification of the [tax] code or court decisions may cause interest on the … bonds to be subject, directly or indirectly, in whole or in part, to federal income taxation," noted official statements on DASNY conduit deals for Northwell Health in January and in 2022. Orrick, Herrington & Sutcliffe LLP acted as bond counsel for both borrowings.
The DASNY disclosure also noted potential secondary-market impact from future action on the tax exemption: "the introduction of enactment of any such legislative proposals or clarification of the code or court decisions may also affect, perhaps significantly, the market price for, or marketability of" the bonds.
Investors in both deals were encouraged to consult with their own advisors on the issue, another typical bond document provision.
"People are more reluctant these days to put in information about specific legislative proposals because that information can become stale very, very quickly," Weinstein said. "So you could have a problem if you put something in a POS about pending legislation — are you going to have to 'sticker' more than once?" he said, referring to the need to update bond documents with fresh information ahead of the transaction.
An early draft of the TCJA axed the exemption for private activity bonds — a provision that did not survive in final legislation — and eliminated tax-exempt advance refunding. The legislative actions did not generate any changes to disclosure language until after it had passed, Weinstein noted.
There have been initial discussions on adding a potential change in federal tax policy to agreements between underwriters and bond issuers that would give underwriters the ability to decline delivery of debt should tax exemption be eliminated, according to Ajay Thomas, head of public finance at FHN Financial.
Bond purchase agreements contain a section detailing carve-outs that would allow underwriters not to proceed under various circumstances. Forward-delivery bond purchase agreements include that section twice, before the initial closing and before the delivery.
Deals with a forward-delivery date might require "a closer look at the language and disclosure as it relates to that as a possibility," Thomas said, adding more people are coming to a consensus that if Congress were to pass something this year it would probably take effect Jan. 1 or later.
"But right now, I've not heard of any issuers or bond counsel or frankly, underwriters that are so concerned about that possibility at this early stage of legislation and then debate that they're wanting to put that in documents today," he said.
"When you're buying tax-exempt bonds, that would be a big material disclosure item and something that changes the landscape of the transaction," he said. "So I would imagine that there will be some discussion going forward as to how that will impact as we get closer, or again, get some more reality around what's the proposal."
The
"SIFMA periodically reviews its model documents and its members continually discuss disclosure trends," said SIFMA's managing director and associate general counsel Leslie Norwood in an email. "At this time, no bill has been introduced that would change the tax-exempt status of municipal bond interest."
Weinstein said while some BPAs have included language about legislation that's still in the early stages of the process, many counsel are reluctant to talk about a specific bill until it's enacted given the unpredictable nature of the legislative process.
"I can guarantee you that every deal team that has an issue they're working on will spend a lot of time talking about this," Weinstein said. "You want to provide disclosure. The problem is, it's just too speculative until it becomes law."
