Four Years On, Alternatives to Tax-Exempt Advance Refundings Continue to Proliferate in Municipal Bond Market
April 6, 2022
In December 2017, former President Donald Trump signed into law the Tax Cuts and Jobs Act. Among the many provisions of the Act was a provision that eliminated the tax exemption for municipal bonds that advance refunded another series of bonds. Prior to its passage, issuers had the ability to issue such bonds on a tax-exempt basis, and did so for a variety of reasons, including to achieve debt service savings. With the loss of tax-exempt status for advance refunding bonds issued after the passage of the Act, issuers and their advisors have searched for alternatives to the traditional tax-exempt advance refunding model.
In this article, we explore some of the alternatives that issuers have applied to achieve the same or similar benefits that would be achieved with a traditional tax-exempt advance refunding. First, we discuss the use of “forward delivery” bonds, where the bonds are sold, but not delivered to investors until a much later date in the future; second, we consider so-called “Cinderella” bonds, which are issued taxable but later convert to tax-exempt; and finally, “tenders and exchanges,” where issuers, often in conjunction with a current issuance, make an offer to investors to acquire their outstanding bonds, either for purchase or exchange.