This week, BABs and other Tax credit bonds took a 7.3% subsidy cut, while SEC actions took center stage with articles on MCDC and underwriters, Municipal Advisors and IRMA as well as SEC Gallagher’s continuing concerns about the Muni Bond Market “bubble”….
CURRENT EVENTS
7.3% Cut for BABs, Other Direct-Pay Bond Subsidy Payments in FY 2015 (BB, Oct 11, 2014)
As of October 1st, the Internal Revenue Service announced that once again issuers of Build America Bonds (BABs) and other direct payment bonds would have their subsidy payments cut by 7.3% because of the sequestration. This is up slightly from 2014’s subsidy cut of 7.2%.
Other direct-payment bonds affected are:
- Qualified School Construction Bonds
- Qualified Zone Academy Bonds
- New Clean Renewable Energy Bonds
- Qualified Energy Conservation Bonds
If you remember, the sequestration started in March 2013 – triggered by Congress’s failure to agree on deficit cutting. It was originally supposed to last through fiscal year 2021; however the cuts were extended twice more – from 2023 to currently 2024.
BABs are taxable bonds that originally were slated to receive a 35% subsidy credit from the Treasury Department. However, as most of our bond documents, read, there are certain events which are considered “extraordinary”. The sequestration cuts triggered extraordinary provisions allowing issuers to redeem them or announce that they can redeem them for any time in the future.
Here is an important note: Remember the 7.3% cut is important for disclosure and reporting purposes when disclosing revenues in the financial statements.
Per the Bond Buyer, “President Obama’s fiscal 2015 budget proposes creating America Fast Forward bonds, which would be similar to BABs, but have a 28% subsidy rate that would be precluded from being cut under sequestration.”
Are you skeptical?
SEC Concerned about MA Registration & Misuse of IRMA Designation (BB, October 10, 2014)
A Deputy Director of the SECs Office of Municipal Securities told members of the National Association of Municipal Advisors that the agency is concerned that MA’s are not registering in a timely fashion.
They have until the end of October to swap their temporary registration for their permanent one under the new rules.
The agency is also concerned that some MAs may be using the IRMA exemption as a way to solicit easy business – there is a concern that some investment bankers will use the IRMA designation to offer bond advice without registering as an MA – which carries more fiduciary duties with it and would also prohibit the investment banker from underwriting a resulting deal.
In other MCDC news…
SEC: Lines Open for MCDC Underwriters (BB, October 6, 2014)
According to the Bond Buyer, the SEC is verbally welcoming broker-dealers who have voluntarily reported missteps under the MCDC initiative, saying “we are open to and would like to have conversations with entities that made submissions and so I would not wait for the SEC, for the enforcement division, to reach out to you.”
How should you interpret this? I can’t say I have any idea, but my mind quickly races to a game of poker.
The SEC is still not providing guidance on what materiality means to them. The article goes on to say that the agency’s goals would be to bring enforcement action “in every instance where we determine that there has been a material violation”.
It further stated that the decision to being enforcement action is particular to the facts and circumstances of individual cases. They conclude that every case is unique as it relates to individual circumstances.
OUT & ABOUT
SEC’s Gallagher Warns of Bond Market “bubble” that could Pop (Reuters, October 1, 2014)
There seems to be questions regarding a possible “liquidity” cliff and an asset bubble that could burst once interest rates rise again.
In recent years, Gallagher has been calling for reforms in both the corporate and municipal bond market, saying they are woefully opaque and lack adequate disclosures for retail investors. In that the $3.7 trillion bond market is “not-insignificant”, it seems these thoughts may continue to gather more attention.
In addition to Bill Gross’s departure from PIMCO causing concerns and significant movement in the bond sector, continued scrutiny on both the volatility of the municipal market as well as its liquidity will be worth watching.
Conferences being held in October and November:
For Healthcare and Higher Ed:
Healthcare and Higher Education Super Conference (Oct 26th-28th, New York, NY)
And another Hot Topic area, Transportation/P3s:
The Transportation Finance/P3 Conference (Nov 16th-18th, Arlington, VA)
SOLVING THE COMPLIANCE PUZZLE
I (Debbie Todd) just fell in love with this graphic as it so clearly and brilliantly represents the puzzling complexity we are dealing with, as issuers, in meeting our compliance needs. We also know that both the IRS and SEC are paying much closer attention to it these days – and that it is our obligation as issuers to understand (and have fully complied with) our respective bond covenants. As part of a 10 week series called Solving the Compliance Puzzle, I will focus on providing tips, insights and resources for one new line of our compliance puzzle.
So, are you ready?
Today, we are zooming in on the sixth line of our puzzle – Guidelines.
A quick question: Have you ever felt like this before? You want to find out the guidelines to something – it could be something as simple as the current standard mileage rate for reimbursements to something rather specific, like what are the 10 key areas you need to focus on to make sure your bonds are in compliance.
With the global reach of the internet, finding the right and simple answer to virtually ANYTHING should be as simple as typing what you want into “search” on Google – no problem, right?
However, in many instances, what really happens is we fall straight into the sea of conflicting information – or worse yet…misinformation. When you are dealing with your bond covenants and millions of dollars in interest expense is on the line, conflicting or flat out wrong information can be costly….really costly.
For kicks, go to the IRS and type in the word “guidelines” – amazing how many results you get, isn’t it?
I remember when I first started working on our bond compliance binders back in the early 2000s – the laws and exceptions were so complex – and I was so new to the field. All I wanted was simple guidelines that pointed me in the right direction so I could start putting the mountains of data I had into some semblance of order and then get back to my normal duties.
Can you relate?
I remember having so many conversations with our bond counsel and asking, “what are the key areas I need to focus on to organize all this stuff?” I just needed some straightforward, understandable answers so I could adopt proper accounting guidelines and move forward. After many rounds of calls and several bond binders later, here is what we finally came up with:
Below are example numbers to illustrate how the 10 lines work…
| $250,000,000 | PAR |
| (1,509,585) | OID |
| 1,206,321 | Premium |
| (15,775,182) | Reserves Deposit |
| (23,990,131) | Construction Period Interest |
| 11,833,096 | Investment Earning |
| $221,764,519 | |
| 95% | Good Use Threshold |
| $210,676,293 | Good Use |
| $213,712,360 | Qualifying Expenditures |
| $3,036,067 | Excess (Deficit) to meet 95% Good Use Test |
Please note: These are simply the guidelines that I used for many years. Following this formula guideline for organizing your bonds does not guarantee that you won’t find some snarly things in your records.
In fact, they may actually do the opposite –and shed light on violations, errors or other uses of funds that may need to be addressed with bond counsel. That is what happened to me…but we addressed them one by one and all was well….even through the audits.
Now, I have a quick question for you…
A few issuers have asked if I could discuss some of the tips I have shared more interactively – either via GoToMeeting or a Google Hangout. Would that be of interest to you?
I participate in a weekly mastermind/ online book club meeting via Google Hangouts, and it works out really well. I am not a video expert at it by any means, but as long as you promise not to laugh at my “timidity regarding online tech skills”, I am game.
I can promise that my abundance of bond compliance skills more than makes up for it…
In that we have members from all over the country, it may take a couple of weeks to get the calendar things worked out, but I am happy to chat with you online if that would be helpful. Just leave a comment below or send me a message and we’ll go from there. OK?
Have a GREAT week!
We hope you found this segment helpful! Stay tuned – next week, we’ll explore the next item in our series – it’s line 7 of the puzzle –Laws.
The greatest compliment you can pay us is to share this newsletter with your issuer friends….
To your compliance success,
Debbie
P.S. Remember, leave a comment below if you are interested in participating in a roundtable video conference call regarding compliance issues.