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LIBOR Transition – Practical Considerations for Commercial Lenders of Tax-Exempt Financing LIBOR Transition – Practical Considerations for Commercial Lenders of Tax-Exempt Financing

LIBOR Transition – Practical Considerations for Commercial Lenders of Tax-Exempt Financing

On November 30, 2020, the ICE Benchmark Administration Limited announced an extension of the date that most U.S. LIBOR values would cease being computed. Now extended to June 30, 2023 instead of the previous target of December 31, 2021, this delayed termination of LIBOR affords banks more time to work through the operational issues, administrative considerations and risk analyses associated with transitioning from LIBOR to a new replacement benchmark index. But banks holding tax-exempt bonds directly purchased from an obligor and the relationship bankers servicing those obligors will have unique issues and considerations when transitioning a LIBOR based tax-exempt interest rate to a replacement benchmark index.

Modifying an existing tax-exempt interest rate is not always as simple as making a similar modification to a taxable instrument. Rarely can this be accomplished with a simple document amendment between the creditor holding the tax-exempt obligation and the obligor on the bonds. In the case of a conduit bond financing, for example, the indexed interest rate provisions may be in an agreement that a conduit governmental issuer is also a party to such that the procedural requirements of the conduit issuer will need to be factored into the amendment timeline and process. Further, any modifications to a tax-exempt interest rate also risk the loss of the exemption. From the IRS’s perspective, a modification, if material or not otherwise in a permissible safe harbor, could trigger a reissuance of the bond for tax purposes. Under federal tax law, the modified instrument is a deemed exchange of the modified, reissued bond for the original bond. This result can have consequences (many times potentially adverse and in other instances favorable) for issuers, borrowers and bank holders of a tax-exempt interest bond if the proper reissuance analysis is not conducted and resulted procedures are not followed. The U.S. Treasury has published proposed regulations to address some of these reissuance matters triggered by the LIBOR transition, but the application of these regulations to the facts and circumstances of each tax-exempt bond requires the input of knowledgeable counsel.

Banks initiating the transition from LIBOR for their client borrowers should understand the documentation necessary, the timeline for effectuating the change and the nuances to the tax analysis involved. While banks are typically protected with robust indemnification provisions and determination of taxability clauses, banks and borrowers would be well served to avoid implicating these provisions by engaging counsel with an expertise in public finance tax matters to help with the transition of the referenced index. Banks should consider engaging such counsel to help ensure the bank’s documentation standards, tax analysis and closing conditions remain consistent across their LIBOR based tax-exempt portfolio. When appropriate, such counsel can advise on the type and scope of legal opinions that may be reasonable for the bank to require from the borrower’s counsel.

Ice Miller’s Public Finance group is comprised of nationally recognized bond counsel familiar with the issues and considerations implicated by the forthcoming transition from LIBOR. For assistance with such matters, please contact David Nie, Jim Snyder, Laurie Miller, Tyler Kalachnik, Mike Melliere or Amy Corsaro.

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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