05.27.2020 | Articles

Why Do We Care About Bond Reissuance?

By Shaun W. Briere, Dorothy J. Heebner, Kimberly L. Martin-Epstein
Banking & Commercial Finance

In previous installments of the Why Do We Care series, we discussed loan modification documentation and covenant waivers at this challenging economic time.  While the same challenges are faced with regard to tax-exempt bond financing facilities, the process is quite different.


Many nonprofit borrowers choose to borrow money through the use of tax-exempt bonds.  This useful financial tool allows nonprofits to borrow money at lower interest rates than private for-profit companies.  Usually, a state agency or other conduit issuer issues the bonds and borrows the money from a bank to give to the nonprofit conduit borrower, who then pays back the bank or bondholders.  Under Internal Revenue Code (the “Code”) section 103, the interest bondholders receive with the repayments is exempt from their federal income taxes.  To qualify for this tax exemption, the bonds must meet the requirements under Code sections 141 through 150 at their time of issuance.

If the issuer, borrower, and bank agree to restructure the debt during the life of the tax-exempt bonds, there is the potential to trigger a reissuance.  After reissuance, the original bonds are treated as retired and exchanged for newly issued bonds.  Generally, the IRS considers “significantly modified” bonds to be new, reissued bonds.  In order for the new bonds to retain their tax-exempt status, the new bonds must meet all of the same requirements as the original bonds, including allocation of volume cap from the state government, a required public hearing[1], a possible change in yield that affects arbitrage investment requirements, and a required new information return.

The COVID-19 pandemic and associated emergency declarations, construction delays, and cash flow issues have led to uncertainty for lenders, issuers, and conduit borrowers like nonprofits.  In response, these parties may want to restructure payment schedules, interest rates, or other bond terms for existing tax-exempt debt.  When taking actions to restructure existing tax-exempt debt, the parties should be careful to not significantly modify the terms of the bonds so as to avoid reissuance, or to be sure to comply with reissuance regulations if reissuance is unavoidable.

Significant Modifications

The significant modification standard comes from Code section 1001 and the associated Treasury Regulations 1.1001-1 and 1.1001-3.  A “modification” is defined as an alteration, deletion or addition of a legal right or obligation of a party to a debt instrument.  A modification is “significant” if, based on all of the facts and circumstances, it changes the legal right or obligation of a party in an economically significant way.  Generally, modifications pursuant to the terms of the documents evidencing the debt are not significant, unless (among other things) they substitute or remove an obligor or change the recourse nature of the debt.  Changes in the term of repayment are modifications, but if a bondholder grants a forbearance that allows a borrower to stop paying for a certain period of time or temporarily waives acceleration of the debt, the forbearance is not a modification unless the time period exceeds 2 years.  In addition, if payments are deferred less than the lesser of (i) 5 years or (ii) half of the original term of payment, then payment deferral is not a “significant modification”.  A change in the annual yield by more than the greater of (i) 0.25% or (ii) 5% of the annual yield of the unmodified instrument is a significant modification.  Substitution of an obligor for recourse debt is a significant modification, but is not a significant modification for nonrecourse debt.  Adding or deleting a co-obligor, changing the security or credit enhancement, and changing the priority of the debt are all significant modifications if the action changes the obligor’s capacity to pay back the debt from adequate to speculative, or from speculative to adequate.  The applicable Treasury Regulations also detail how different modifications interact with one another and their cumulative effect.  Furthermore, if a nonprofit borrower violates the ongoing tax restrictions relating to property financed with tax-exempt bonds, certain remedial actions can also be significant modifications that trigger a reissuance.

In a March, 2020 letter to the United States Congress, the National Association of Bond Lawyers recommends legislative changes that would allow issuers, bondholders, and conduit borrowers to negotiate new terms for existing tax-exempt debt without triggering reissuance.[2]  As of the date of this publication, the IRS has not adopted these changes.


Since March, 2020, the municipal bond market has undergone unprecedented instability because of the COVID-19 pandemic (the Federal Reserve, for the first time, has started buying large amounts of outstanding municipal debt to shore up the market[3]).  Market instability can have large effects on the fluctuating interest rates of outstanding tax-exempt tender option bonds or variable rate demand bonds.  In response, issuers and conduit borrowers of variable rate bonds may want to repurchase the bonds and hold them to avoid the high interest rates in the market. However, the repurchase of tax-exempt debt may also trigger reissuance.[4]

A conduit borrower of bond proceeds, like a nonprofit, may buy certain types of their own bonds without triggering the reissuance requirements, as long as the conduit borrower is not related to the issuer under the proposed IRS regulations.[5]  With some restrictions, issuers may repurchase certain types of their own bonds now, as well, under Notice 2020-25, published by the IRS in direct response to the COVID-19 pandemic.

Why Do We Care?

The COVID-19 pandemic and associated state of emergency changed the economic circumstances for everyone, banks, bondholders, issuers, and nonprofit conduit borrowers included. To meet the challenges of these changed circumstances, many of these parties may want to restructure existing tax-exempt debt.  However, the reissuance trigger limits how debt can be restructured, and may bar some borrowers from restructuring at all.  Before restructuring tax-exempt debt, parties should consult with experienced bond counsel to make sure they can restructure without adverse impact.

[1] Revenue Procedure 2020-21, published by the IRS in direct response to the COVID-19 pandemic on May 4, 2020, allows these public hearings to occur by telephone rather than in person.

[2] https://www.nabl.org/DesktopModules/Bring2mind/DMX/API/Entries/Download?portalid=0&EntryId=1340, LISTING OF RECOMMENDATIONS TO BE IMPLEMENTED BY THE TREASURY, Section C

[3] https://www.politico.com/news/2020/04/09/fed-to-buy-municipal-debt-178222

[4] The IRS proposed new reissuance regulations in late 2018 meant to consolidate and encompass the provisions in earlier guidance relating to qualified tender bonds (Notice 88-130, Notice 2008-27, and Notice 2008-41) (proposed regulations available at https://www.govinfo.gov/content/pkg/FR-2018-12-31/pdf/2018-28370.pdf). As of now, issuers of tax-exempt bonds can elect to follow the proposed reissuance regulations or the existing guidance. Under the proposed regulations, three actions can trigger reissuance: (1) a significant modification as described above, (2) the issuer or a related party buys the bonds in a way that eliminates the bondholder’s investment, or (3) the bonds are otherwise redeemed.

[5] https://www.govinfo.gov/content/pkg/FR-2018-12-31/pdf/2018-28370.pdf

This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.

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