Consolidated Arbitrage

1
Consolidated Arbitrage
Dianne Stewart Partner San Antonio BondResource
Partners, LP 210 979 3709 Email
stewartd_at_bondresourcepartners.com

• August 2, 2005

2
Law

• Treasury Regulation 1.148-4 Yield on an Issue
  of Bonds
• (a) In general . . . .The Commissioner may permit
  issuers of qualified mortgage bonds or qualified
  student loan bonds to use a single yield for two
  or more issues.

3
History

• EFC January 13, 1993 Comment Letter on Proposed
  Regulations
• Final regulations should continue to permit
  joint yield calculations.
• Existing regulations permit issuers to do joint
  yield computations for two or more issues by
  establishing to the satisfaction of the
  Commissioner that the single computation of yield
  will not distort yield or otherwise tend to
  defeat the purposes of section 103(c). Treas.
  Reg. 1.103-13(c) (1) (ii). Issuers of SLRBs
  have utilized this provision from time to time
  and may have a need to utilize it in the future.
  EFC suggests that the proposed regulations be
  clarified to permit joint yield computations with
  a ruling.

4
Business Reasons Presented in PLR 200403095

• It will allow the Issuer to forgive student loans
  in a nondiscriminatory manner. Presently, due to
  the fact that some Existing Issues have yields
  above the rates set by the U.S. Department of
  Education while others have yields below loan
  rates, certain borrowers may receive monetary
  benefits through loan forgiveness based solely on
  which Existing Issue was available to finance the
  loan.
• It will enable the Issuer to more efficiently
  accomplish its purpose of financing student loans
  by managing those loans as a single portfolio
  and, thus, ensure access to lower cost financing
  for anyone who desires a college education.
• It will enable the Issuer to monitor more
  efficiently and accurately its compliance with
  the arbitrage rules for both purpose and
  non-purpose investments.

5
Mechanics Established in PLR 200403095

• All outstanding tax-exempt bonds treated as one
  tax-exempt bond
• Issuance Date Issuance Date of the Oldest
  Outstanding Bond
• Maturity Date Latest Maturity Date of the
  Outstanding Bonds
• The Bond will usually be treated as a Variable
  Rate Bond.
• All Student Loans will be included in one
  arbitrage calculation under one set of permitted
  spread rules.
• All non-purpose assets will be included in one
  arbitrage calculation.
• The Bond must be subject to current 1993
  Regulations.
• The Bond is eligible for one 1,000 rebate credit
  per year and one 100,000 BDSF earnings exclusion
  per year.
• Computation date options will be selected at the
  first combined yield calculation after permission
  obtained.
• Any previous arbitrage payments made by any
  outstanding bond will be treated as a payment
  toward the consolidated bond liability.
• IRS will not consider cherry-picking certain
  bonds to combine. This is an all or nothing
  concept with one exception No Pre-Tax Reform
  Act of 1986 bonds can be included.

6
Advantages of Consolidated Arbitrage

• Monetize Negative Rebate Liabilities through
  reduced current payments to IRS or IRS refunds of
  prior payments.
• Administrative savings associated with reduced
  recordkeeping (track by Indentures, not by Bond).
• Administrative savings associated with reduced
  time in managing portfolio yields with Bond
  Yields (Loan Swaps).
• Blend Excess Interest positive and negative
  liabilities.
• Defer forgiveness of Excess Interest liability.

7
Disadvantages of Consolidated Arbitrage

• Potential Loss of 150 bp excluding SAP rule.
• Only one 1,000 rebate computation credit per
  year.
• Only one 100,000 Bona Fide Debt Services Fund
  exclusion per year.