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Final IRS LIBOR Transition Regulations Published Final IRS LIBOR Transition Regulations Published

Final IRS LIBOR Transition Regulations Published

On January 4, 2022, the Department of Treasury published final regulations containing guidance on the tax consequences of the transition away from the use of certain interbank offered rates in debt instruments (bonds/notes), derivative contracts (swaps) and other contracts.  The final regulations provide that “covered modifications” will not be treated as an exchange of property resulting in a reissuance.  Further, a covered modification with respect to an integrated hedging transaction is not treated as terminating the qualified hedge provided that no later than 90 days following the first covered modification the resulting hedge satisfies the requirements of a qualified hedge. 

The final regulations differ in structure from the proposed regulations (found here) released in October 2019 by adopting the term “covered modification” as well as eliminating the fair market value requirement contained in the proposed regulations.  Instead of using a fair market value requirement, the final regulations provide specific examples of modifications that would not be “covered modifications.”  The final regulations seek to exclude a change in cash flows as a covered modification.  However, the fundamental concept from the proposed regulations that permits replacement of an IBOR based rate with a qualified rate and no resulting reissuance remains in the final regulations.  In essence, the final regulations clarify that modifications made solely to maintain the cash flows that were in place prior to the modifications will not result in a reissuance of the debt instrument.

The final regulations provide that a “covered modification” includes:

  1. modification of a contract to replace an operative rate that references a discontinued IBOR with a qualified rate, to make a qualified one-time payment, and to make associated modifications (which includes a modification to the credit spread based on the adjustment spread used or recommended by the International Swaps and Derivatives Association and the Alternative Reference Rates Committee (ARRC);
  2. modification of the terms of a contract to include a qualified rate as a fallback to an operative rate that references a discontinued IBOR and make associated modifications; and
  3. modification of the terms of a contract to replace a fallback rate that references a discontinued IBOR with a qualified rate and make associated modifications;

A qualified rate includes a qualified floating rate such as SOFR, a rate selected, endorsed or recommended by ARRC as a replacement for USD LIBOR, as well as a rate determined by reference to the foregoing including by adding or subtracting a specified number of basis points.

For questions regarding this alert or LIBOR transition with respect to tax-exempt obligations and related derivatives in general, please contact:  amy.corsaro@icemiller.com; philip.genetos@icemiller.com; tyler.kalachnik@icemiller.com; ben.kitto@icemiller.com; david.nie@icemiller.com; susan.price@icemiller.com.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

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