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

1
Introduction to Tax-Exempt 501(c)(3) Bonds

• William P. Scott, Esq.
• Nixon Peabody LLP

2
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)

3
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)

4
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

5
Introduction to Tax-Exempt 501(c)(3) Bonds

• Bond Interest Rates (contd)
• 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 doesnt cover tendered
  bonds
• Relationship between Credit and Liquidity
  Providers

6
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

7
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

8
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.

9
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

10
Introduction to Tax-Exempt 501(c)(3) Bonds

• Timing of a Bond Transaction (contd)
• Determination of Financing Structure
• Security and covenants
• Due Diligence
• TEFRA Approval (Public Hearing, Elected Official
  signs)
• Borrowers board approval
• Preliminary Official Statement (POS)
• Inclusion of financial statements, agreed-upon
  procedures ltr.

11
Introduction to Tax-Exempt 501(c)(3) Bonds

• Timing of a Bond Transaction (contd)
• 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)