Introduction to Tax-Exempt 501(c)(3) Bonds

Document Sample
Introduction to Tax-Exempt 501(c)(3) Bonds Powered By Docstoc
					Introduction to Tax-Exempt 501(c)(3)
               Bonds


             William P. Scott, Esq.
             Nixon Peabody LLP
            Introduction to Tax-Exempt 501(c)(3) Bonds



• Legal Basis

  – State Law authorizing issuance

     • State Tax Exemption – Kentucky v. Davis case


  – Section 145 of Internal Revenue Code

     • 95% Test (no activities producing UBIT)
            Introduction to Tax-Exempt 501(c)(3) Bonds



• Bond Financing Documents
  – Trust Indenture
     • Form of Bond
         – Redemption Provisions
     • Grant of Security
     • Trustee-held Funds
         – Purposes: e.g. construction, debt service and reserves
         – Investment of Funds
     • Defaults and Remedies
     • Defeasance (i.e. refunding)
              Introduction to Tax-Exempt 501(c)(3) Bonds



• Bond Interest Rates
   – Fixed Rate
   – Variable Rate Demand Bonds
      • Weekly or Daily rate changes
      • Optional Tender by Bondholders
   – Commercial Paper (or Flexible) Rates
      • Interest pricing on each individual bond
   – Multi-Annual or Term Rate
   – Mandatory Tenders of Bonds (when they occur)
   – Role of Remarketing Agent or Auction Agent
                  Introduction to Tax-Exempt 501(c)(3) Bonds



• Bond Interest Rates (cont’d)
    – Auction Rate (more to come in panel discussion)
        • Auction Process
• Credit Enhancement
    – Letter of Credit
        • Confirming letter of credit
    – Bond Insurance
        • Rating downgrades
• Liquidity Facility
    – Standby Bond Purchase Agreement
    – Used when Credit Enhancer doesn’t cover tendered bonds
    – Relationship between Credit and Liquidity Providers
            Introduction to Tax-Exempt 501(c)(3) Bonds



• Interest Rate Swaps
  – Purpose
  – Documentation
  – Termination Payments
     • Mark-to-market effect on financial statements
  – Effect on financial covenants
     • Entering into swap
     • Financial ratio covenants
  – Insurance of Swap
            Introduction to Tax-Exempt 501(c)(3) Bonds




• Financing Agreement with Borrower
  – May be loan, lease or sale agreement
  – In Mass., is combined with Trust Indenture
     • and called a Loan and Trust Agreement
  – Borrower agrees to pay debt service on Bonds
            Introduction to Tax-Exempt 501(c)(3) Bonds



• Master Trust Indenture
  – Purposes:
     • Repeat borrowings with parity security
     • Pooling credit strength of Obligated Group
        – Joint and several liability
  – The Obligated Group uses the Master Indenture to issue
    Notes and Guaranties
  – In a bond financing, the Note (or Guaranty) goes to the
    Bond Trustee under the Bond Indenture.
              Introduction to Tax-Exempt 501(c)(3) Bonds



• Timing of a Bond Transaction
  – Selection of Financing Team
     •   Underwriter
     •   Financial Advisor?
     •   Borrower Counsel
     •   Bond Counsel
     •   Selection of Issuer?
     •   Credit Enhancement?
     •   Trustee
               Introduction to Tax-Exempt 501(c)(3) Bonds



• Timing of a Bond Transaction (cont’d)
   – Determination of Financing Structure
        • Security and covenants
   –   Due Diligence
   –   TEFRA Approval (Public Hearing, Elected Official signs)
   –   Borrower’s board approval
   –   Preliminary Official Statement (POS)
        • Inclusion of financial statements, agreed-upon procedures ltr.
               Introduction to Tax-Exempt 501(c)(3) Bonds



• Timing of a Bond Transaction (cont’d)
   –   Marketing of Bonds
   –   Bond Purchase Agreement (Issuer Approval)
   –   Final Official Statement
   –   Closing
   –   Post-closing
        • Reporting required under financing documents
        • Continuing Disclosure – SEC Rule 15c2-12
        • Arbitrage Rebate (unless exempt)