WASHINGTON — The Treasury Department released interim guidance yesterday instructing municipal issuers how to issue four tax-credit bonds as direct-subsidy bonds, as was authorized by a jobs law enacted in March.
The 14-page notice also makes clear that for purposes of determining issue price, issuers of the new direct-pay tax-credit bonds and Build America Bonds can rely on the tax-exempt bond rules, putting to rest some of the concern surrounding the issue. Several bond attorneys had assumed the tax-exempt bond rules should apply to BABs, but the notice marks the first explicit Treasury guidance clarifying that point.
“It’s helpful to see it in writing,” said Frederic J. Ballard of Ballard Spahr LLP.
The notice did not delve into what role, if any, secondary market trading might play in determining issue price, another controversial topic. Instead, the Treasury said it and the Internal Revenue Service are determining whether further prospective guidance is needed on issue price.
But the guidance details how to calculate premium on the direct-pay bonds.
The interim guidance outlines how issuers of qualified school construction bonds, qualified zone academy bonds, qualified energy conservation bonds, and new clean renewable energy bonds can take advantage of the new direct subsidy payment mode.
Under the new law, issuers of QCSBs and QZABs can have roughly 100% of their interest costs subsidized by direct payments from the federal government. The payments are to be determined by the lesser of the actual interest rate of the bonds or the daily credit rate for municipal tax-credit bonds set by the Treasury. Issuers of QECBs and new CREBs can receive subsidy payments equal to 70% of their interest costs or the Treasury rate, whichever is lower.
Issuers of all four of the direct-pay tax-credit bonds can apply for their subsidy payments in a similar fashion to the existing payment system for BABs, the Treasury said.
The direct-pay option has been praised by muni market participants as an effective way to boost the fledgling tax-credit bond market, which has failed to gain significant traction over the years.
The notice states that the applicable credit rate will be determined on the first day for which there is a binding, written contract for the sale or exchange of the bond.
The notice also states that a special statutory premium restriction for BABs also applies to direct-pay tax-credit bonds. The American Recovery and Reinvestment Act that authorized BABs stated they could not be sold at more than a de minimis amount of premium, which is defined as 1/4 of 1% of the stated redemption price at maturity for the bond, multiplied by whichever comes first: the number of complete years to the maturity date for the bonds or the first optional redemption date for the bond.
The premium limit was put in place to ensure that issuers do not artificially inflate the interest rates of their BABs to obtain larger subsidy payments.
The federal government will begin making payments on the bonds starting with interest payments due on Sept. 1, according to the notice.
In addition, the IRS will be prepared by July 12 to process revised Forms 8038-CP, which issuers must file each time they request a payment.
Issuers of fixed-rate bonds will have to file their 8038-CPs at least 45, but not more than 90 days, before their interest payment date. The subsidy payment will be made on the interest payment date.
Issuers of variable-rate bonds will have to file their 8038-CPs on a quarterly basis and will be reimbursed for interest paid during that time. They will have to file the form at least 45 days after the last interest payment date during the quarter.
An issuer will have to submit to the IRS an information form, 8038-TC, at least 30 days before they plan on filing their first payment request form.
The IRS will be prepared to process these forms by June 25 and they will be available on the IRS website, the Treasury said.