March 6, 2013 - On Friday, March 1, 2013, the sequestration provisions of the Budget Control Act of 2011 (“Sequestration”) went into effect. As a result, according to the Internal Revenue Service, federal subsidy payments relating to Direct-Pay Tax Credit Bonds will be reduced by 8.7 percent of the amount that would otherwise have been paid to the issuer.
Direct-Pay Tax Credit Bonds are taxable bonds for which the federal government makes a direct payment equal to a percentage of the interest due, and include:
Issuers of Direct-Pay Tax Credit Bonds may want to review their bond documents with their bond counsel and/or financial advisor to understand the potential effect of Sequestration on their Direct-Pay Tax Credit Bonds, and may wish to consider the following actions:
Determine the amount of the shortfall and, if the issuer relies on the federal payment amounts to make timely interest payments, develop alternative plans to meet debt service requirements.
Determine whether the subsidy payment is paid directly to the issuer or is sent directly to a debt service fund held by a paying agent, and work with the paying agent and/or filing agent to ensure that Form 8038-CP is filed in a timely manner.
For issuers of Direct-Pay Tax Credit Bonds that are payable from utility revenues, determine whether a reduction in the payment materially impacts any bond covenants.,
In addition, issuers who are preparing to sell bonds should consult with bond counsel and/or disclosure counsel about whether Sequestration will have a material effect on the issuer’s financial picture in general, including anticipated receipt of significant federal grant funds, payments-in-lieu-of-taxes, or other potential impacts.
For further information, click on the links above or contact any member of our Municipal Government and Public Finance practice groups.