Despite investor challenge, issuers may have legal backing in BAB refundings
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Issuers that have refunded outstanding Build America Bonds or have plans to do so using an extraordinary redemption provision may have legal backing, regardless of whether bondholders are “unhappy” with the deals, according to the largest bond counsel in the industry.
Chas Cardall, a tax partner at Orrick, the bond counsel that worked on the recent Regents of the University of California deal
The court case supports the conclusion that sequestration “resulted in a materially adverse change to the cash subsidy payment obligation,” they said.
BABs were issued with the idea that the subsidy was promised, but the 35% subsidy has been reduced multiple times through sequestration. The current sequestration rate stands at 5.7%.
However, the investors argue in the letter that sequestration does not constitute an “extraordinary event,” which can only happen if there is a change to the Internal Revenue Code.
“Thus, no extraordinary event has occurred because the reduction in the BAB subsidy is not material,” the investors wrote. “If the reduction in the subsidy related to the sequestration provisions of the Budget Control Act of 2011 were indeed material, surely the issuer would have exercised the extraordinary optional redemption more than 10 years ago, when such reduction in the Build America Bond subsidy initially went into effect.”
