On May 22, 2019 the Internal Revenue Service released I.R.S. Notice 2019-39 (the “Notice”). A copy of the Notice is attached to this memorandum. The Notice answers the following question: “Can bonds that are subject to volume cap limits or issuance time deadlines be current refunded if the legislation authorizing such bonds is silent as to the ability to current refund such bonds?”

The Notice broadly approves the issuance of tax-exempt current refunding bonds (“Refunding Bonds”) to refund obligations (“Original Bonds”) for which there is not otherwise statutory authority for a current refunding. However, the Notice imposes several limitations described below:

• The refunding ability applies only to Original Bonds for which there are bond volume caps, issuance time deadlines or both, and for which the authorizing statute does not address the permissibility of current refunding bonds. Original Bonds can include bonds issued under programs that existed previously or programs that may be introduced by Congress in the future. For example, Original Bonds can include Build America Bonds (BABs), Tribal Economic Development Bonds and bonds issued pursuant to programs to provide disaster relief (such as Gulf Opportunity Zone Bonds) or to promote economic development or redevelopment (such as Recovery Zone Facility Bonds). 
• The Original Bonds (or the initial bonds in a chain of refundings) must have been issued with any required bond volume cap allocation and before any applicable time deadline for the issuance of the Original Bonds (or of the initial bonds in a chain of refundings) has expired.
• The issue price of the Refunding Bonds must not be greater than the outstanding stated principal amount of the Original Bonds. For Original Bonds issued with more than a de minimis amount of original issue discount or premium, the present value of the Original Bonds is used instead of the outstanding stated principal amount. The purpose of this requirement is to ensure that no more Refunding Bonds are issued than necessary to pay the redemption price of the Original Bonds. Costs of issuance and other transaction costs of the refunding would generally need to be paid from other sources of funds and not with proceeds of the Refunding Bonds.
• The Refunding Bonds must meet all applicable requirements for the issuance of the Original Bonds (excluding, of course, any bond volume cap requirement or original issuance time deadline). For example, the Refunding Bonds must satisfy the requirement that the average maturity of the bonds not be longer than 120% of the reasonably expected economic life of the refinanced facilities, if such requirement applied to the Original Bonds.

As a reminder, a “current refunding” generally consists of an issue of bonds that is issued to refund (and pay off) bonds of a prior issue not more than 90 days after issuance of the refunding bonds. The Notice applies only to tax-exempt current refundings. The Notice does not provide authority to issue tax-exempt bonds for advance refundings (i.e., where bonds of the prior issue are refunded and paid off more than 90 days after issuance of the refunding bonds). The Notice also will not apply to bonds for which the authorizing statute may prohibit current refundings.

While the Notice states that Build America Bonds may be current refunded, the Notice is presently of limited value because the current refunding issue must consist of tax-exempt bonds. The Notice is not written to allow the Refunding Bonds to continue to exist as Build America Bonds. We are participating in industry efforts to receive clarification from the Internal Revenue Service as to the references in the Notice to Build America Bonds.

Similar refunding guidance has existed for Recovery Zone Facility Bonds (see I.R.S. Notice 2014 9) and for various disaster relief bonds including Gulf Opportunity Zone Bonds, qualified Midwestern disaster area bonds and qualified Hurricane Ike disaster area bonds (see I.R.S. Notice 2012-3). The Notice is intended to supersede Notices 2014-9 and 2012-3 and applies to current refunding issues that are issued on or after May 22, 2019 – but issuers may also apply the Notice to current refunding issues that are issued before May 22, 2019. This memorandum was prepared for the general informational use of the clients and attorneys of Kutak Rock LLP and reflects our understanding of the matters set forth herein as of the time of its release. The views on the topics presented may change as our experience with the matters discussed herein deepens.

 IRS Releases Broad Current Refunding Guidance