On November 30, 2020, the ICE Benchmark Administration Limited announced an extension of the date on which most US LIBOR values ​​would cease to be calculated. Now extended to June 30, 2023 instead of the previous target of December 31, 2021, this delayed LIBOR termination gives banks more time to resolve operational issues, administrative considerations and risk analyzes associated with switching to LIBOR. to a new replacement benchmark. . But banks with tax-exempt bonds purchased directly from a debtor and bankers dealing with those debtors will have unique issues and considerations when transitioning from a tax-exempt interest rate based on the debtor. LIBOR to a replacement benchmark.

Changing an existing tax-exempt interest rate is not always as simple as making a similar change to a taxable instrument. This can rarely be accomplished with a simple document amendment between the creditor holding the tax-exempt bond and the debtor on the bonds. In the case of bond financing, for example, the provisions on indexed interest rates may be included in an agreement to which an intermediary government issuer is also a party, so the procedural requirements of the intermediary issuer will need to be considered. taken into account in the modification schedule. and process. In addition, any change in a tax-exempt interest rate also risks losing the exemption. From the IRS perspective, a change, whether significant or not within an authorized safe harbor, could trigger a reissue of the bond for tax purposes. Under federal tax law, the amended instrument is a deemed exchange of the amended and reissued bond for the original bond. This result can have consequences (often potentially unfavorable and in other cases favorable) for issuers, borrowers and banks holding a tax-exempt interest bond if the appropriate reissue analysis is not performed. and that the resulting procedures are not followed. The US Treasury has issued regulatory proposals to address some of these reissue issues triggered by the transition to LIBOR, but applying these regulations to the facts and circumstances of each tax-exempt bond requires legal counsel. competent.

Banks initiating the LIBOR transition for their borrowing clients should understand the necessary documentation, the timeline for making the change, and the nuances of the tax analysis involved. While banks are generally protected by robust indemnification provisions and the determination of tax clauses, banks and borrowers would be well served to avoid involving these provisions by engaging counsel with expertise in corporate tax matters. public finances to help the benchmark transition. Banks should consider using such advisers to ensure that the bank’s documentation standards, tax analysis and closing conditions remain consistent across their LIBOR-based tax-exempt portfolio. . Where appropriate, such advice may provide advice on the type and scope of legal advice that the bank may reasonably require from the borrower’s lawyer.