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Federal Regulations Spark Important Issue Price Considerations

By Susan Borries Reed, Director of Disclosure Strategy and Services, July 27, 2017

On June 7, 2017, new issue price regulations were effective (which are set forth in Treasury Regulation Section 1.148-1).  These regulations prescribe how issuers of tax-exempt bonds may determine the issue price on these bonds.  This is important to municipal bond issuers because there are now multiple ways to establish issue price, instead of the “reasonably expected initial offering price to the public on the sale date” method that existed prior to June 7th.

Due to the multiple considerations, Umbaugh and bond counsel will be talking with issuers about considerations around the various ways issue price may be established.  Keep in mind that “issue price” will not impact the amount of bond proceeds that an issuer receives, but rather it relates to the bond yield on the bonds being issued and has tax implications.  The regulatory change necessitates a “team approach” because bond and tax counsel will likely walk issuers through tax considerations while Umbaugh, as a municipal advisor, will provide insight into considerations around marketing the bonds and the bond sale.

Under the new regulations, there is a “General Rule” that provides that the issue price of the bonds is the first price at which a substantial (10% of each maturity) amount is sold to the public.  The challenge with the General Rule is that an issue price might not be “established” by the time the bonds close, or even when tax reporting begins.  As a result, this is not really an option for bond issues where an issue price will be important, like with an advance refunding.  An alternative for issuers that must, or want to, know the issue price by the time of closing has been nicknamed the “hold the offering price” option.  The hold the offering price option allows for the issue price to be treated as the initial offering price to the public as of the sale date, provided certain conditions are met, including that the underwriter would agree in writing that it will neither offer nor sell the bonds to any person at a price higher than the bonds’ initial public offering price from the sale date until the earlier of: (a) the close of the 5th business day after the sale date, or (b) the date on which the underwriters have sold at least 10% of the bonds (of the particular maturity) at or below such bonds’ initial public offering price.  The challenge with the hold the offering price option is that there has been discussion that this approach may not be as attractive to bidders and may affect bond prices as underwriters may assume more risk than they do with the General Rule.

There is also a definition in the new federal regulations for “competitive sale”.  After a sale occurs, if an issuer is able to show that a bond sale was a competitive sale under the federal definition, then establishing issue price is much easier as the issue price is equal to the “reasonable expected initial offering price to the public on the date of sale.”  The challenge is that an issuer will not know if a competitive sale is achieved until after the bond sale has occurred.  Unfortunately, this unknown requires an issuer to provide bidders with the alternative plan within the notice of bond sale and preliminary official statement.  As a result, discussions about issue price should happen well in advance of when any notice may need to be published.  With negotiated sales, there is more flexibility, but discussions should also occur as early as possible.

The bottom line is that the new issue price regulations are very new.  There is still much speculation about the best approach and what the true impact of the new regulations will be.  As always, Umbaugh will watch for trends and will let you know if there are things about which we believe issuers should know. Umbaugh will be happy to provide you with a copy of the regulation (which is short considering all the choices it includes) as well as other materials summarizing options available under the regulation. 

Please contact us at .(JavaScript must be enabled to view this email address), for additional information.

 

Information in this article was believed current as of the date of publication. As you know, changes occur frequently. The information presented is of a general educational nature. Before applying to your specific circumstances, please contact us at vision@umbaugh.com.


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