February 7, 2022


The Internal Revenue Service, an Agency of the U.S. Treasury Department (the “Treasury”) has recently released guidance regarding a modification of IBOR, including LIBOR-based instruments, (the “Libor Final Regulations”) and the permitted use of State and Local Fiscal Recovery Funds (“SLFRF”).

The Libor Final Regulations expand the implementation of the no-reissuance safe-harbor for “covered modifications” of debt instruments and derivatives that provide for a new qualified rate, like SOFR, in liue of an existing LIBOR-based or another interbank offered-based rate (IBOR). The Libor Final Regulations clarify not only that a modification made to maintain the cash flows that were in place prior to the modification will not result in a reissuance of the debt instrument, but also that, an integrated hedging transaction will not be treated as terminated so long as, within 90 days following the first covered modification of either the debt or the hedge, the resulting hedge meets the requirements of a qualified hedge, including identifications. To comply with this safe-harbor, any modification has to occur between January 4, 2022, and June 30, 2023. These rules generally provide that:

  • a covered modification is a modification that (i) replaces a discontinued IBOR with a new qualified rate (such as SOFR or a fallback rate that is reasonably expected to measure contemporaneous variations in the cost of the newly borrowed funds in that currency), (ii) may provide for an on-market one-time qualified single cash payment, and (iii) may include associated modifications necessary to implement the new rate;
  • the replacement rate must be of the same currency;
  • off-market payments to induce the exchange or that take into account the financial conditions of the borrowers are not covered by the safe-harbor; and
  • noncovered modifications must be tested separately to determine whether a reissuance has occurred.

Treasury further stated that other arbitrage and private business use issues remain under consideration.  Special rules apply for determining whether a reissuance occurs in the event a waterfall of rates is added to the instruments. 

The SLFRF Regulations were issued, in part, in response to questions related to the use of COVID relief funds to shore up debt service and other budgetary items.  With them, Treasury conclusively clarifies that the use of such funds to pay debt service on existing debt, replenishing financial reserves, pay for settlements and judgments, or fund pension funds among other items, is not a permitted use of those funds.  Generally, these rules also expand on the ability to use these funds for certain water and sewer infrastructure in a way that is intended to match those uses with permitted uses under EPA programs.  Among other items clarified, Treasury provided that federally-owned public water systems and for-profit noncommunity water systems are not eligible to receive SLRSF funds. 

For additional information and a more in-depth analysis of any particular fact situation, please contact Stefano Taverna, Hal Flanagan, or Ruben Preciado at (214) 754‑9200.

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This Tax Law Update was provided by McCall’s Tax Department.  It is intended for informational and marketing purposes only, and it is not to be construed as legal advice to any person or with regard to any matter.  While we hope that this update is helpful to you, McCall is not responsible for any specific transaction or reporting position taken by any person after review hereof.

© 2022 McCall, Parkhurst & Horton L.L.P.. ALL RIGHTS RESERVED.

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