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Case Studies

In the current economic environment, municipal issuers are facing many challenges in bringing their debt issues to market efficiently and cost-effectively. In this section we provide examples of some of these client issues, the challenges they faced and how we worked with them to bring their project financing to a successful conclusion.

Georgetown, MA – Qualified Energy Conservation Bonds

QECBs – Qualified Energy Conservation Bonds are tax credit bonds authorized by Congress for state and local governments to finance certain types of energy projects.  Each state receives an amount of issuance that is then allocated to state agencies or local governments.  QECBs are taxable bonds, but the U.S. Treasury pays a subsidy to the issuer of the bonds, which make them attrative to issuers.  The subsidy for QECBs are the lesser of the actual interest payable for a given maturity or 70% of the tax credit rate on the date of pricing.  The result is a lower effective interest rate for the issuer.


There are two types of tax credit bonds that an issuer can choose.  One is the Direct Pay, where the issuer receives the subsidy payment.  The other is the Tax Credit, where the purchaser receives the tax credit.


In 2012, the Town of Georgetown had applied for and received an allocation of QECBs from the Department of Energy Resources for its energy conservation project.  The Town had six months from the date of award to finance the project as QECBs or lose their allocation.  The Town chose to issue Direct Pay bonds and sold the issue on a competitive basis in October, 2012.  The Town received three bids for the issue, with the lowest bid having a TIC fo 2.59%.  The tax credit rate on the date the issue sold was 4.27%.  After the subsidy payments, the net yield on the issue was 0.21375%.


With Direct Pay Bonds, in order for the Town to receive the subsidy payments, an IRS 8038-CP form must be completed and filed before every payment (twice a year).  A form for each maturity needs to be filed to receive the subsidy for that corresponding maturity.  For Georgetown, the first year the Town filed 13 forms.


In September, 2012, the impact of the 2011 Budget Control Act was starting to have implications for local governments.  For tax credit issuers, including QECBs, the results of the sequestration for 2013 was an 8.7% subsidy reduction.  The reduction for 2014 is 7.2%.  Georgetown’s payments were reduced accordiningly and the subsidy reduction was not material for the Town.  If the reductions start to have financial implications for the Town, there is the option for the Town to redeem the bonds.  The bonds were sold with an “Extraordinary Optional Redemption” provision.  If there is a significant event as defined by the IRS, the Town has the option to call the Bonds.

Swampscott, MA - Bond Defeasance

In recent years, issuers of municipal bonds – and other participants in the capital markets – have focused increasingly on the post-issuance compliance of tax-exempt bonds with the provisions of the Internal Revenue Code.  Because of stepped-up enforcement by the Internal Revenue Service and the Securities & Exchange Commission, issuers have had to focus more on whether they have met expenditure exceptions to the obligation to rebate arbitrage earnings.  They have also had to assure that assets financed with tax-exempt securities have retained a governmental purpose.


It was in this context that the Town of Swampscott, Massachusetts needed to remedy a “change in use” of an asset purchased with tax-exempt bonds.  This asset was a former synagogue that the Town purchased in 2006 with the proceeds of tax-exempt bonds.  At that time, the Town planned to convert the building into a police station or other Town offices.


As time passed, the Town’s plans changed.  The Town decided to build an entirely new police station and the Town renovated its Town Hall.  The Town decided that it did not have any further use for the former synagogue – and so offered the building for sale.  That sale, closed in November 2013, was to a private developer.  Because the sale was to a private party, the Town was required under the Internal Revenue Code to apply the proceeds of the sale, which totaled $1,850,000, to (1) defeasing to maturity or first redemption date any outstanding bonds issued to finance the purchase of the synagogue, (2) defeasing any other bonds issued for a similar capital purpose, (3) funding directly any similar capital purposes, and (4) reasonable costs of the defeasance transaction.


UFASI assisted the Town with identifying the bonds to be defeased, structuring a defeasance escrow (using U.S. Treasury State and Local Government series securities, or SLGs), and executing necessary documents, including replacement bonds.  While the main objective of the transaction was maintaining the tax-exemption of the Town’s bonds, the transaction was executed efficiently, producing economic debt service savings of approximately $95,000.

Lewiston , ME - Refundings

With the low interest rates that have prevailed over the past few years, many issuers have taken advantage of bond market conditions to refund or refinance their debt.  One such issuer is the City of Lewiston, Maine.


Lewiston has sold refunding bonds five times in the past five years.  The aggregate present value savings from these transactions is approximately $5.6 million with total refunding par amount of approximately $50 million.


In September 2010, the City sold taxable and tax-exempt refunding bonds.  Present value savings totaled nearly $720,000 (with a refunding par amount of approximately $5.6 million).  The City was able to increase the savings realized on the transaction by refunding a portion of the taxable refunded bonds with tax-exempt bonds, as allowed under the Internal Revenue Code.  Doing this likely increased by between $10,000 and $15,000 over what it would have been otherwise.


In May 2011, the City sold $10,000,000 taxable refunding bonds to refund pension obligation bonds sold by the City in December 2001.  The City sought budgetary savings by extending the life of the bond issue by four years, but also realized more than $670,000 in present value savings on the transaction.  The transaction would not have been possible had the City not placed a call provision on the original transaction – something that was unusual for taxable issues in 2001 – and something that UFASI suppported the City in doing.


In February 2013, the City sold $52.4 million par amount of general obligation bonds, $29.6 million of which refunded five series of outstanding bonds.  The City realized debt service savings of approximately $3.7 million present value.